Income Tax Appellate Tribunal - Hyderabad
Vesil Spa Italy Rep By M/S Techtran ... vs Assessee on 11 May, 2000
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' B ', HYDERABAD
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER
AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
ITA No.491/Hyd/2000
Assessment Year 1991-92
Vesil SPA Italy Represented by Vs The JCIT, Range 5,
M/s Techtran Poly lenses Ltd., Hyderabad
Hyderabad
(PAN T-604/43-401-CO-7673)
(Appellant) (Respondent)
Appellant by : Shri A.V. Sadasiva
Respondent by : Smt. Vasundhara Sinha, DR
ORDER
PER N.R.S. GANESAN, J.M.
1. This appeal preferred by the assessee is directed against the order passed by the CIT(A)-IV, Hyderabad dated 11/5/2000 and pertains to the assessment year 1991-92. The only issue arises for consideration is the taxability of US$ 7.50 lakhs paid by the assessee to M/s Vesil SPA, Italy.
2. Shri A.V. Sadha Siva, the learned representative for the assessee submitted that the assessee company is engaged in the business of manufacture of Ophthalmic Lenses. In the course of its business activity, the assessee company entered into an agreement with M/s Vesil SPA, Italy. As per this agreement, the assessee was also required to pay Royalty on the basis of the sales in the domestic market as well in abroad. Referring to Article 2 of the Agreement between the assessee and M/s Vesil SPA, Italy, the learned representative submitted that the assessee has purchased the know-how and paid a lump sum of US $ 7.50 lakhs. The foreign company namely M/s Vesil SPA, Italy has to transfer the entire document and material in relation to technical know-how for 2 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad manufacturing of lenses. The learned counsel submitted that this agreement is not a contract for providing technical services. According to the learned counsel, this is a outright purchase of know-how for manufacturing activity. Therefore the payment made by the assessee was a business receipt of the foreign company and hence it is not taxable in India. According to the learned representative, the foreign company has no permanent establishment in the territory of India. Therefore both under the Income Tax Act and under the Double Taxation Avoidance Agreement between the government of India and Govt. of Italy, the business receipt of a foreign company which has no permanent establishment in India are excluded from the taxation.
3. Further, the learned representative submitted that Article 3 of the Agreement provides for payment of fees and consideration. As per this article, the assessee has to pay the cost of know-how on 3 installments. The 1st installment of the 1/3 amount has to be paid not later than 45 days after the receipt of clearance from the Govt. of India. The 2nd installment of 1/3 of amount shall be paid to the foreign company at the commencement of the training at the premises of the foreign company or on the delivery of the specifications. The 3rd installment has to be paid on completion of first 50,000 (fifty thousand) lenses of commercial production. Apart from this, payment for purchase of the know-how, the assessee has also required to pay under Article 3 of the Agreement, an amount of US $ 0.10 per pair of lenses on the domestic sales and US $ 0.16 per pair of lenses sold outside India. Therefore, apart from the technical know-how, the assessee was also specifically required to pay the Royalty on the sales. The lump sum payment of US $ 7.50 lakhs is a business receipt in the hands of foreign company for sale of know-how to the assessee. Since, admittedly the foreign company has no permanent establishment in India, the receipt of sale of technical know-how being a business profit cannot be taxed in India. The learned counsel placed reliance on the judgment of the 3 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad Apex Court in the case of Union of India and Another Vs. Azadi Bachao Andholan & ANR 263 ITR 706 and submitted that the Apex Court while considering the DTAA between the govt. of India and Govt. of Mauritius, found that a Treaty between two sovereign countries takes into account only the person who are liable to taxation in the contracting State. The very purpose of DTAA is to ensure that benefits under the agreement are available even if they are inconsistent with provisions of the Income Tax Act of the respective countries. Therefore, whenever a benefit was conferred under the DTAA between the two sovereign countries, the benefits available under the agreement has to be provided to the citizens of the respective countries even though such benefits are contrary to the Income Tax Act of the respective countries.
4. The learned representative further submitted that in this case the assessee has paid the 1st installment of 1/3 amount of the lump sum payment to the extent of Rs.30,59,441/- equivalent to US $ 1.75 lakhs after deducting tax at source of Rs.13,11,189/-. The assessee has also filed return of income in representative capacity claiming refund of Rs.13,11,189/-. Therefore, according to the learned representative, it is not a case of non deduction of tax at source. The cases relied upon by the assessing officer as well as the CIT(A) are in respect of non deduction of tax at source while making the payment. In this case, the learned representative submitted that the tax was deducted and the assessee also filed return of income in representative capacity and the issue is only the refund of the amount paid to the government after deduction of tax at source. Therefore, the case laws relied upon by the CIT(A) is not applicable to the facts of this case. On a query from the Bench, regarding the 2nd and 3rd installments, the learned representative for the assessee clarified that the assessee had not paid the 2nd & 3rd installments in pursuance to the agreement. According to the learned representative for the assessee, only first installment was paid by the assessee.
4 ITA.No.491/Hyd/2000Vesil SPA, Italy, Hyderabad
5. The learned representative again placed reliance on the decision of the Pune 'A' Bench of this Tribunal in the case of DCIT Vs. Finolex Pipes Ltd. 106 TTJ 741 and submitted that when the payment was made for transfer of design, document to German Company, it was held by the Pune Bench that payment was by way of outright purchase of technical know-how. Therefore it was not in the nature of Revenue within the meaning of DTAA between the Govt. of India and the Govt. of German. Accordingly, the Pune Bench held that in the absence of permanent establishment in India the fee paid by the assessee was not taxable in India. Though this case relates to deduction of tax at source, according to learned representative, this decision of the Pune Bench laid down the principles after considering the DTAA on identical set of facts.
6. The learned representative for the assessee further placed reliance on the decision of the Special Bench of this Tribunal in Graphite Vicarb India Ltd. vs. ITO 43 ITD 28 (SB) and submitted that the Royalty was defined under the Act. As per the definition of Royalty any payment made for use or the right to use any design, plan or copyright. On identical set of facts, the Special Bench of this Tribunal examined the DTAA between the government of India and France and found that the lump sum payment made by the assessee for transfer of technical know- how by France Company was a business receipt and the France Company has no permanent establishment in India, therefore it is not taxable in India. In view of this decision of the Special Bench, according to the learned representative, the 1st installment paid by the assessee towards lump sum payment for outright purchase of technical know-how cannot be considered to be taxable income of the foreign company in India. The learned representative further placed reliance on the decision of the Delhi Bench of this Tribunal in the case of Munjal Showa Ltd. Vs. ITO (2001) 117 Taxman 185.
5 ITA.No.491/Hyd/2000Vesil SPA, Italy, Hyderabad
7. The learned representative further placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Swadeshi Polytyex Ltd. Vs. ITO (1991) 38 ITD 328 and also the 3rd Member decision of ITAT, Jaipur Bench of in the case of Modern Threads (I) Ltd. Vs. DCIT (1999) 69 ITD 115.
8. Referring to the judgment of the House of Lords in Rolls Royce Vs. Jeffery 56 ITR 580, the learned representative submitted that the issue before the House of Lords was whether the receipt on sale of know-how by a manufacturer of Aircraft Engine, the foreign company is a trading receipt or a capital receipt? The House of Lord held that it was form part of trading receipt of Rolls Royce. Therefore, according to the learned representative the judgement of the House of Lords in Rolls Royce (supra) also supports the case of the assessee. Once it is treated as a trade receipt in the hands of the foreign company and in the absence of permanent establishment in India, the same is not liable for taxation in India. Therefore, according to the learned representative the assessee is entitled for refund of Rs.13,11,189/-.
9. On the contrary Smt. Vasundhara Sinha, the learned departmental representative submitted that there was no outright sale of technical know-how as claimed by the assessee. According to the learned representative the assessee was given a right to use the technical know- how therefore what was paid by the assessee is only a Royalty and not a purchase price. Therefore, the payment made by the assessee cannot form part of trading receipt of the foreign company. The learned departmental representative referred to Sec. 90(2) of the Income Tax Act and submitted that whenever the govt. of India entered into an agreement with government of any other country, in order to avoid double taxation the assessee to whom such agreement applies, the provisions of the Income Tax Act shall apply to the extent it is more beneficial to that assessee.
6 ITA.No.491/Hyd/2000Vesil SPA, Italy, Hyderabad According to the learned representative the assessee who is entitled to take benefit of DTAA between the two sovereign countries are entitled to take benefit either under the DTAA or under the Income Tax Act whichever is more beneficial to the assessee. Referring to Article 7.7 of the DTAA between the govt. of India and govt. of Italy, the learned representative submitted that when the profit includes an item of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article. According to the learned representative Article 23 of the DTAA specifically provides for an item of income which was not dealt with in the earlier articles of this agreement may be taxed in both the contracting states. Therefore, even in case the receipt of the foreign company does not fall in article 7 of the DTAA it will definitely fall under the article 23 of the DTAA. Placing reliance on the Authority for Advance Ruling in IMT Labs. India (P) Ltd. 287 ITR 450, the learned representative submitted in the case before the authority for advance ruling a license was given to Indian resident company to use software developed by a non resident company on its server flat form and the Indian company paid licence fee to the non resident. The authority for advance ruling held that the payment made by the resident company for using the software in India amounts to Royalty and fee for technical service. Therefore it is taxable in India. In view of this decision of authority for advance ruling, according to the learned representative the fee paid by the assessee for use of the technical know- how in manufacturing of ophthalmic lenses is also a Royalty and fee paid for use of technical service in India therefore it is taxable in India.
10. The learned DR again referred to Article 23 of the DTAA and submitted that this is a residuary clause and applicable in all cases where the other clauses of the article may not be attracted. Referring to clause D of the protocol to the DTAA the learned DR pointed out that the expression "Other income" includes fees for technical services. Learned DR further 7 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad submitted that no definition is given for the expression technical services in the DTAA. Therefore, the definition given in the Income Tax Act can be safely adopted to find out whether it is a technical service or not. Learned Representative also placed reliance on the judgment of the Madras High Court in CIT vs. Retter Ingolsteadt Spinnerimaschinenbau AG (2006) 285 ITR 199.
11. Referring to Article 18 of the agreement between the parties learned representative submitted that capital goods means all the goods purchased by the assessee from the foreign company to produce the products. Referring to article 2 of the agreement the learned Representative submitted that what was given to the assessee is only a right to use the technical know how. Therefore, there was no out right sale of the technical know how by the foreign company. If it is a right to use what was paid by the assessee is only a royalty. If there was a outright sale and transfer of technical know how then the payment made by the assessee to the foreign company may be a business receipt in the hands of the foreign company. Since the agreement clearly provides for right to use the technical know how according to the learned DR what was paid by the assessee is a 'royalty' therefore, it is taxable in India.
12. Learned DR again referred to page 19 of the paper book and submitted that the agreement defines the term licensee and licensor. The assessee-company is referred as licensor and the Indian Company is referred as licensee. Therefore, what was given to the Indian company is only license to use the technical know how and it is not a outright sale.
13. Referring to Article 5.2 of the agreement between the parties the learned DR pointed out that the licensee shall not be free to supply the technical know how to any other party without consent of the licensor. Therefore, there was a constrain on the part of the licensee even for sub- leasing the technical know how. Learned representative again referred to 8 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad article 5.5 of the agreement between the parties and submitted that the licensee has to maintain secrecy of the know how and there was a prohibition to disclose the same to any other person. The agreement was entered into for initial period of 8 years with an option to renew the same for another period of 5 years. Referring to article 5.9 of the agreement the learned representative pointed out that after termination of this agreement, right of the licensee will be expired immediately. Referring to page 18 of the paper book the learned DR pointed out that capital goods are not part of the agreement. The agreement between the parties is exclusively as licensor and licensee so as to permit the Indian company to use the technical know how in their manufacturing activity. Learned representative placed her reliance on the decision of the Authority for Advanced Ruling in Air Port Authority of India in Re (2008) 304 ITR 216 and submitted that the Authority for Advanced Ruling examined an identical DTAA between India and USA and felt that payment made for the right to use the software and documentation was 'royalty income' both under the Income Tax Act, 1961 and under Article 12 of DTAA. Therefore, it was taxable in India. The decision of Authority for Advanced Ruling is squarely applicable to the facts of this case. Referring to Article 13 of DTAA learned Representative submitted that the royalty was defined in Article
30. However, the term 'technical service' was not defined in the DTAA. Therefore, we have to take the definition given in section 9 (1) (vii) of the Income Tax Act. Section 9 (1) (vii) of the I.T. Act read with Article 23 of the DTAA clearly shows that the payment made for right to use technical know how would fall within the term 'royalty', therefore, it is taxable in India. Therefore, according to the learned Representative, claim of the assessee that they have purchased the technical know how on outright sale is not justified. Therefore, assessee is not entitled for refund of Rs.13,11,189/-. On a query from the Bench, whether the assessee had paid the 2nd and 3rd installments as per the agreement, the learned representative, very fairly submitted that nothing on records to suggest that the assessee had paid 9 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad the 2nd and 3rd installments. Therefore, the learned departmental representative submitted that the assessee would not have paid the 2nd and 3rd installments as clarified by the learned representative for the assessee.
The learned departmental representative placed reliance on the following judgements:
1. Judgement of the Apex Court in Alembic Chemical Works Co. Ltd. Vs. CIT (1989) 177 ITR 377.
2. Authority for Advance Ruling in Dun and Bradstreet Espana SA., In re (2004) 272 ITR 99.
3. The judgement of the Calcutta High Court in N.V. Philips Vs. CIT (1987)
4. Decision of the Chandigarh Bench of the Tribunal in DCIT Vs. Majestic Auto Ltd. 51 ITD 313 (Chandigarh)
5. Mumbai Bench of the Tribunal in G.U.J. Jaeger GmbH Vs. ITO 37 ITD 64
14. We have considered the rival submissions on either side and also perused the materials available on record. The question arise for consideration is, whether the assessee is entitled for refund of Rs.13,11,189/- which was paid to the Government account after deduction at the time of payment of first installment ? The claim of the assessee is that they have purchased the technical know-how on outright sale. It appears from the order of the lower authority that the assessee also claimed that even if the payment is treated as 'royalty' the same is not taxable in India since the foreign company has no permanent establishment in India. The main contention of the department is that the agreement between the parties shows the exclusive right of the Indian Company to use the technical know-how and the technical know-how cannot be disclosed to any other persons. There was a prohibition to sub-
license the technical know-how. There was a prohibition even to disclose 10 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad the employees of the Indian Company. Therefore, in view of this confidentiality clause in the agreement, the department contends that what was paid by the assessee is for technical services rendered by a foreign company, therefore, it is taxable in India. The department has also found that even if the payment is treated as 'royalty' the same is liable for tax in India even though there was no permanent establishment of the foreign company in India.
15. The first question arise for consideration is, whether the payment made by the assessee is for purchase of technical know-how or it is a payment for technical services provided by the assessee ? It is not in dispute that if it is purchase of technical know-how then the amount paid by the Indian company to foreign company is not taxable in India since it would be of business receipt in the hands of the foreign company. Let us examine the agreement between the parties. Article 4.1.1 of the agreement requires the foreign company to transfer the technical information to the Indian company. For the purpose of convenience we are reproducing Article 4.1.1 of the agreement between the foreign company and the Indian company.
"4.1.1 The information shall be transferred to LICENSEE either through appropriate technical documents or other equally effective means, which shall be prepared by LICENSOR in the light of experience possessed by LICENSOR in respect of the products at the time of delivery of such documents."
16. Article 5.2 provides for exclusive use of the technical know- how by the Indian company. No doubt, this Article 5.2 says that the Indian company shall not sub-lease the agreement to other party without consent of the foreign company. However, Article 5.3 enables the Indian Company 11 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad to transfer and assign the agreement in favour of any company or an association or organization. The only obligation of the Indian company is to inform the foreign company about the transfer or the assignment. For the purpose of convenience, Article 5.3 is reproduced hereunder :
ARTICLE 5.3 TRANSFER AND ASSIGNMENT "5.3.1. LICENSEE shall be at liberty to transfer, entrust or assign this agreement to any existing association, organization or company or to any association, organization or company which may be formed for the purpose of the works which shall exercise all the rights and be liable for all the obligations of LICENSEE conferred herein in the same manner as if this Agreement had been entered into between such association, organization, or company and be liable for all the obligations of LICENSEE conferred herein in the same manner as if this Agreement had been entered into between such association, organization, or company and LICENSOR provided however, that LICENSEE shall not be absolved from its obligations which have accrued or which may accrue subsequently under this Agreement."
17. In view of these clauses in Article 5.3.1, there is no restriction to transfer or assign the agreement to any association or organization or a company. The lower authorities has not taken into consideration this right of the assessee to transfer and assign the agreement in favour of other company or organization. The lower authorities specifically confined to the 12 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad clauses in Article 5.2 and Article 5.5. In our opinion, the entire agreement has to be read harmoniously in order to give effect to the intention of the parties. The very fact that the assessee was free to transfer and assign the agreement in favour of other company or association or organization, it cannot be said that the assessee was given the exclusive right to use the technical know-how transferred by the foreign company. One more important thing to be noted is that after expiry of this agreement the Indian Company has a right to use the very same technical know-how for their manufacturing activity. If it is not outright sale the foreign company would not have permitted the Indian company to use the technical know- how supplied by them after the expiry of the agreement. Article 5.9 of the agreement specifically says that after expiry of the agreement or its termination, the Indian company shall continue to use the very same technical know-how for its business and other information supplied by the foreign company. This is obvious under Article 5.9.3 of the agreement. If the intention of the parties is not to sale the technical know-how out rightly the foreign company would have restricted the usage of the Indian company after the expiry of the agreement period or on termination of the agreement. Since, the intention of the parties to use the technical know- how even after the expiry of the period or on the termination of the agreement, in our opinion, the Indian company purchased the technical know-how outright sale.
18. One more important clause in the agreement which was not taken into consideration by the lower authorities is Article 2.7 of the agreement. Under Article 2.7 of the agreement, the foreign company clearly given the patent right to the Indian company. Article 2.7.3 of the agreement enables the Indian company to get the patent right registered in the name of the Indian company during the period of the agreement. If the intention of the parties is not to sale the technical know-how to the Indian company then the foreign company would not have allowed the Indian 13 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad company to register the patent right in the name of the Indian company. More over, besides the lumpsum payment of three installments the Indian company has to pay royalty to the foreign company at US $ 0.10 per pair of lenses on the sales in India and US $ 0.16 per pair of lenses on sales outside India. Therefore, a clear distinction was made between the lumpsum payment for sale of technical know-how and the royalty for usage of the patent right during the period of agreement. In view of the above, the lumpsum payment made by the Indian company cannot be construed either as a fee for technical services or as a royalty. In our opinion, in view of the right given by the assessee to register patent in the name of the Indian company and the right given to the Indian company to transfer and assign the agreement in favour of other persons, the technical know-how is transferred on outright sale. Therefore, it cannot be construed as payment of royalty or technical services. Moreover, the assessee has not received the 2nd and 3rd installment in pursuance of the agreements. Therefore, the terms of the agreement was not fulfilled. In those circumstances, the part payment namely, the 1st installment cannot be construed as payment for royalty or technical service. At the best, it may be considered as business receipt.
19. We have also carefully gone through the judgment of the Apex Court in the case of Alembic Chemicals Ltd. vs. CIT (1989) 177 ITR 377. In the case before the Apex Court the assessee-company engaged in manufacture of Antibiotics & Pharmaceuticals. The assessee was granted a license for manufacture of well known antibiotic penicillin. In order to increase the yield of penicillin, the assessee entered into an agreement with Japan Company for supply of technical know-how so as to increase substantially higher level of performance or production. As per the agreement the assessee has to pay US $ 50,000 as one time payment for supply of technical know-how to the Japan Company. The assessee- company claimed the payment made to the Japan Company as revenue 14 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad expenditure exclusively laid out for the purpose of business. The Assessing Officer however, found that the expenditure incurred by the assessee for acquiring the technical know-how is an advantage or enduring benefit to the assessee therefore, it was to be treated as capital expenditure. The Tribunal also confirmed the view of the Assessing Officer. At the instance of the assessee a reference was made to the Gujarat High Court. The Gujarat High Court found that the expenditure was incurred for the purpose of setting up of a new plant and a new process. Therefore, the expenditure incurred for introducing a new process of manufacturing with a view to installing a new plant has to be considered only as a capital expenditure and not as revenue expenditure. Accordingly, the Gujarat High Court has also confirmed the view of the Assessing Officer. On further appeal by the assessee before the Apex Court it was found that the assessee-company was in the business of manufacturing of antibiotics and penicillin. Even after the agreement with the Japan Company the assessee continued to manufacture penicillin. The Apex Court further observed that mere improvement or updating the fermentation process would not necessarily amount to an enduring benefit. The Apex Court further found that the outlay under the agreement was for the better conduct and improvement of the existing business. Therefore, the expenditure incurred by the assessee is of revenue expenditure.
20. The CIT (A) after referring the observations of the Apex Court in the case of Alembic Chemicals Ltd. (supra), more particularly at page No. 390 of the ITR found that the case of the assessee is similar to one in the case of Alembic Chemicals Ltd. For the purpose of convenience we are reproducing the observations of the Apex Court at page 390 of ITR 177.
"It would, in our opinion, to unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any particular stage in this fast changing 15 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad area of medical sciences. The state of the art in some of these areas of high priority research is constantly updated so that the know how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make use a little slow and circumspect in too readily pigeon holing an outlay such as this as capital. The circumstances that the agreement in so far as it placed limitations on the right of the assessee in dealing with the know how and the conditions as to non inference that the right pertained more to the use of the know how than to its exclusive acquisition.
By taking into consideration this observation of the Apex Court, the CIT (A) found that the exclusive right given to the assessee cannot be considered to be a acquisition of know how. The Apex Court clearly observed that these factors namely non partiability, confidentiality and secrecy of the know how inclined towards the inference that the right pertain more to the use of the know how than to its exclusive acquisition. Therefore, this may be one of the inference. In the case before us, the Indian Company was permitted to transfer/assign the agreement. Moreover, a right was given to the Indian to register the patent right in its names.
21. As we have observed earlier, when the right was given to the Indian Company to register the patent right in its name to transfer and assign the agreement in favour of other company clearly shows that the intention of the party was for exclusive sale of the know how and not a mere right to use. If we read the agreement harmoniously, giving reflect to all the clauses of the agreement, it clearly shows that there was an acquisition of the technical know-how by the Indian company. Therefore, in our opinion, the Judgment of the Apex Court in the case of Alembic Chemicals Ltd. (supra) may not be of any assistance to the Revenue. The matter would stand on entirely different footing, in case the right of the Indian company to register the patent in its name as provided in Article 16 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad 2.7 and the right to transfer and assign the agreement in Article 5.3 of the agreement are not there. In view of this specific clauses in Article 2.7 and 5.3 of the agreement with regard to patent right and transfer and assign the agreement itself, in our opinion, what was transferred to the assessee is exclusively technical know-how on outright sale.
22. We have also carefully gone through the decision of the Authority for Advanced Rulings in IMT Labs (India) Pvt. Ltd. in Re (2006) 287 ITR 450. In the case before the Authority for Advanced Rulings the applicant-company entered into an agreement with USA Company for securing license for a particular software which the applicant-company was entitled to use. The applicant-company has to pay license-fee for the software. The issue before the Authority for Advanced Rulings was whether the periodical payments made by the applicant-company to the non- resident USA company having no office/permanent establishment in India in connection with use of software are subject to tax deduction at source ? While examining this question, the Authority for Advanced Rulings found that the periodical payments made by the applicant-company are in the nature of royalties and fees for technical service, therefore, taxable under Article 12 of the Double Taxation Avoidance Agreement (DTAA). The Authority for Advanced Rulings distinguished its earlier decision in Dun and Bradstreet Espana S.A., In re. (2005) 272 ITR 99 on the ground that there was a sale of software in Dun and Bradstreet Espana S.A., (supra) which is akin to sale of book and the payment received by the foreign company was the business profit under Article 7 of the DTAA. In view of this decision of the Authority for Advanced Rulings it is obvious that wherever there is a sale, the receipt shall be treated as business profit of the foreign company. Wherever there is only a right to use the software, then it is a payment of royalty. In view of our finding while interpreting the agreement that there was a sale of technical know how by the Italy company to Indian company in our opinion, what was received by the Italy 17 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad company is only a business receipt. Therefore, in the absence of any permanent establishment in India the same cannot be taxed in India in view of DTAA.
23. We have also carefully gone through the judgment of the Calcutta High Court in N.V.Philips vs. CIT (1988) 172 ITR 521. In the case before the Calcutta High Court Netherland Company . entered into an agreement with an Indian company to furnish technical information relating to manufacture and sale of vitamin-D. The Indian company has to pay 5% of the net selling price to the foreign company as consideration. The assessee contended before the Assessing Officer that the amount received from Indian company was by way of technical assistance fees. The Assessing Officer accepted the contention of the assessee and held that only 10% of the receipt of the foreign company would be treated as taxable income as the same was towards technical assistance fees. However, the Administrative Commissioner in exercise of his power under section 263 of the Income Tax Act, 1961 found that the payment received by the foreign company was in the nature of 'royalty'. The Tribunal also confirmed the view of the Administrative Commissioner. In the re-assessment proceeding pursuant to order under section 263 of the I.T. Act, the Assessing Officer found that the payment received by the foreign company is nothing but royalty. In those factual situation the Calcutta High Court found that the entire payment received by the foreign company for supply of data, assistance for manufacture of products of the assessee in India on payment of fixed percentage of net selling price. In those facts and circumstances, the Calcutta High Court found that what was received by the foreign company is a 'royalty'. In the case before the Calcutta High Court there was no separate payment for purchase of technical know how. The Indian company has to pay 5% on net selling of the Vitamin-D. 18 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad
24. However, in the case before us, apart from a fixed percentage on sale on lenses in the domestic market as well as in the foreign market the Indian company has to pay a lumpsum payment for purchase of technical know how. The foreign company has also permitted the Indian company to register the patent right in the name of the Indian company in India. The Indian company cannot register the patent in its name, unless, the Indian company became the owner of the product in India. Therefore, the right given to the Indian Company to register the patent in its name is nothing but transfer of technical know how. Moreover, an option was given to the Indian company to transfer/assign the agreement in favour of other company/organization. The Indian company was also given the right to continue to use the technical know how even after expiry of the agreement or its termination. In those facts and circumstances, in our opinion, the Judgment of the Calcutta High Court may not be of any assistance to the Revenue.
25. We have also carefully gone through the decision of Chandigadh Bench of this Tribunal in the case of DCIT vs. Majestic Auto Ltd. (supra) In the case before the Chandigadh Bench of this Tribunal, an Australian company entered into an agreement with Indian company for production of mopeds and motor cycles. As per the agreement, the Australian company granted exclusive and indivisible right and license to the Indian company to use the manufacturing information supplied by the Australian company. The Indian company shall pay Australian Shillings of 3 Million net of tax in consideration of information supplied by the Australian company. The Indian company has also required to pay royalty at a fixed rate. In those circumstances, the Chandigadh Bench of this Tribunal found that what was paid by the assessee is a 'royalty' for use of the know how in their manufacturing process. Therefore, it is taxable in India.
19 ITA.No.491/Hyd/2000Vesil SPA, Italy, Hyderabad
26. In the case before the Chandigadh Bench of this Tribunal, the Indian company was not given any right to register the patent right in their name. There was no clause in the agreement to transfer/assign agreement in favour of any other company or organization and no right was given to the Indian company to continue to use the technical know how after termination or expiry of the agreement. In view of this distinctive features in our opinion, this decision of the Chandigadh Bench of this Tribunal may not be of any assistance to the Revenue.
27. We have also carefully gone through the decision of Mumbai Bench of this Tribunal in the case of G.U.J. Jaeger GmbH vs. ITO (1991) 37 ITD 64. In the case before the Mumbai Bench an Indian company entered into an agreement with the foreign company for supply of technical know how. The Mumbai Bench found that the agreement is for improvement the method of manufacture pursuant to research and development carried on by the assessee. The agreement also provided for training to the employees of the Indian company. Under these circumstances, it was opined that very negligible part of consideration was shown for training. Accordingly, it was estimated at 20% and the balance amount was found to be for providing recurring know-how including improvements in the methods of manufacture. In this case also there is no clause for permitting the Indian company to register the patent right in its name. More over, there is no clause which permits the transfer/assign of right in favour of other company/organization. Therefore, this decision of the Mumbai Bench also may not be of any assistance to the Revenue.
28. In view of the above discussion, in our opinion, there was a transfer of technical know how in favour of Indian Company, therefore what was received by the Italy-company is a business receipt. Since admittedly there is no permanent establishment in India, the same is not 20 ITA.No.491/Hyd/2000 Vesil SPA, Italy, Hyderabad liable to be taxed in India. Accordingly, we set aside the Order of the lower authorities.
29. In the result, appeal of the assessee stands allowed.
Order pronounced in the open Court 29 .10.2010
Sd/- sd/-
CHANDRA POOJARI N.R.S. GANESAN
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated 29th the October, 2010
Copy forwarded to:
1. M/s M. Anandam & Co., Chartered Accounts, 6549, RP Road, Secunderabad.500 003.
2. The JCIT, SR-5, Hyderabad
3. CIT(A)-IV, Hyderabad.
4. CIT, Hyderabad
5. The D.R., ITAT, Hyderabad.
VBP