Income Tax Appellate Tribunal - Bangalore
Biocon Biopharmaceauticals Private ... vs Assessee on 22 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND
SHRI.JASON P.BOAZ, ACCOUNTANT MEMBER
ITA Nos. 507 to 510/Bang/2009
Assessment years : 2004-05, 2005-06, 2006-07 & 2006-07
BIOCON Biopharmaceuticals Vs. The Income Tax Officer
Private Ltd., (International Taxation),
20th K.M., Electronic City, Ward 19(1),
Hosur Road, Bangalore.
Bangalore - 560 100.
PAN : AACCB 2633F
APPELLANT RESPONDENT
Appellant by : Shri H. Padamchand Khincha, C.A.
Respondent by : Shri S.K. Ambastha, CIT-I(DR)
Date of hearing : 22.03.2013
Date of Pronouncement : 19.04.2013
ORDER
Per Bench ITA Nos. 507, 508 & 510/Bang/2009 are appeals by the assessee against the common order dated 25.02.2009 of the CIT(Appeals)-IV, Bangalore confirming the orders dated 22.12.2006, 22.12.2006 and 20.12.2006 of the ITO (International Taxation), Ward 19(1), Bangalore, holding the assessee as an 'assessee in default' u/s. 201(1) of the Income-
ITA Nos.507 to 510/Bang/2009 Page 2 of 56 tax Act, 1961 [hereinafter referred to as "the Act" in short"] and levying interest u/s. 201(1A) of the Act on the tax not deducted at source for the assessment years 2004-05, 2005-06 & 2006-07.
2. ITA No.509/Bang/2009 is an appeal by the assessee against the order dated 25.02.2009 of the CIT(Appeals)-IV, Bangalore, confirming the order dated 04.04.2007 of the ITO (International Taxation), Ward 19(1), Bangalore, holding the assessee as an 'assessee in default' u/s. 201(1) of the Act and levying interest u/s. 201(1A) of the Act on the tax not deducted at source for the assessment year 06-07.
3. All these appeals involve common issues and arise for consideration on same facts and circumstances. Having heard these appeals together, we deem it appropriate to pass a common order. The facts and circumstances giving rise to these appeals are as follows.
4. An Indian company by name 'M/s. Biocon India Ltd.,' registered under the Companies Act, 1956 [hereinafter called as "BIOCON"] is a pioneer in biotechnology and was engaged in the manufacture and marketing of various enzymes, active pharmaceutical ingredients and specialty chemicals.
5. CIMAB SA, Cuba [hereinafter referred to as "CIMAB"] is a Cuban company engaged in research, development, manufacturing and marketing of biopharmaceuticals. CIMAB had developed technology for some products which are necessary for manufacture of drugs for treatment of cancer. "Technology" means :-
ITA Nos.507 to 510/Bang/2009 Page 3 of 56
(a) know-how viz,, information required for scientific, technical and technological evaluation of production of the products;
(b) technical information viz., information, whether patented or acquired by CIMAB relating to manufacture of products on commercial scale; and
(c) technical assistance i.e., assistance to transfer technology.
Thus "technology" developed by CIMAB has the above three ingredients.
6. BIOCON and CIMAB entered into a joint venture agreement dated 22.02.2002 (JVA) whereby they agreed to form a joint venture company (JVC) in India. As per the JVA, BIOCON as its part of capital contribution to the joint venture company(JVC) (to be formed), agreed to incur cost of constructing/securing the biotechnological plant and circulating capital of the joint venture company for beginning the production and first operation of the joint venture company. CIMAB on its part towards capital contribution to the joint venture company (to be formed), agreed to transfer technology in respect of some products. It was agreed that the investment to be made by BIOCON will be equivalent to 51% of the paid-up capital of the JVC and the value of the technology brought in by CIMAB would be equivalent to 49% of the paid-up capital of the JVC. The paid-up capital of the JVC was dependent on the capital for constructing/securing the Biotechnological Plant and circulating funds for beginning the production and first operation of the JVC and all these had to be borne by BIOCON as its share of capital contribution to the JVC. The cost so borne will be 51% of the issued, subscribed and paid up capital of the JVC and based on the ITA Nos.507 to 510/Bang/2009 Page 4 of 56 above 49% of the paid-up capital had to be allotted to CIMAB which will be the value of the technology brought in by CIMAB for use by the JVC.
7. As agreed under the JVA, a JVC was formed. The assessee herein was the JVC so formed. As agreed under the JVA, 49% of the paid-up share capital of the assessee was to be allotted to CIMAB and the same was quantified at 64,58,200 equity shares at Rs.10/- per equity share. The assessee issued shares to CIMAB as under:
Date of No. of shares allotted Q)
Value (Q
issue
30.03.2004 4,21,400 42,14,000
(A.Y.04-05)
30.09.2004 17,24,800 1,72,48,000
(A.Y.05-06)
30.09.2005 21,56,000 2,15,60,000
(A.Y.05-06)
31.03.2006 21,56,000 2,15,60,000
(A.Y.06-07)
8. The assessee debited capital work-in-progress account and credited share capital account. Thus the value of the shares issued to CIMAB was the value of the technology that was brought in by CIMAB as capital contribution to the JVC.
9. The assessee filed an application u/s. 195(2) of the Act on 13.01.2005, a copy of which is at page Nos.338 to 348 of the assessee's paperbook. The application narrates various circumstances under which shares ought to be issued to CIMAB and that the consideration paid by the assessee to CIMAB in the form of shares is not a payment which could be said to be "royalty" within the meaning of the definition given in the Act. In the application, the assessee prayed for grant of permission to issue equity ITA Nos.507 to 510/Bang/2009 Page 5 of 56 shares against transfer of technology without deduction of tax at source. It should be mentioned here that this application was made by the assessee on 13.01.2005. Even prior to this date, the assessee had already issued 4,21,400 and 17,24,800 equity shares to CIMAB i.e., on 30.03.2004 and 30.09.04 respectively. There is no reference to the fact that certain shares had already been issued to CIMAB in its application dated 13.01.2005. The Assessing Officer passed an order dated 22.02.2005, a copy of the same is at pages 333 & 334 of the assessee's paperbook. The AO in this order, purported to have been passed u/s. 195(2) of the Act, was of the view that the assessee's stand that issue of shares against of transfer of technology would be in the nature of capital contribution of CIMAB and CIMAB would not earn any income was correct. The concluding portion of the order of the AO reads as under:-
"In view of the above, I hereby authorise the applicant to issues equity shares against transfer of technology without deduction of tax at source.
This order will be effective for issues of shares against the transfer of technology under the joint venture agreement filed with us. This certificate is provisional and is subject to final assessment proceedings. This certificate is issued at the request of the application and as per present provisions of the law. This order will be effective for the issue of shares made upto 31st March 2005 unless it is cancelled with prior intimation to the applicant."
(emphasis supplied)
10. It can be seen for the aforesaid order that the same is valid for issue of shares made upto 31.3.2005. The Assessee did not issue any further shares upto 31.3.2005. The Assessee further issued shares to CIMAB of ITA Nos.507 to 510/Bang/2009 Page 6 of 56 21,56,000 on 30.9.2005. The Assessee made an application dated 17.10.2005 to the AO pointing out that, a certificate of nil deduction of tax at source had been granted by him by order dated 22.2.2005 and further submitted that the said certificate was valid only for shares issued upto 31.3.2005 and that the validity of the said certificate be extended upto 31st March, 2006 to enable the Assessee to issues of shares proposed to be made upto 31.3.2006. No order whatsoever was passed by the AO on the application made by the Assessee. The Assessee further issued shares to CIMAB of 21,56,000 on 30.9.2005.
11. The Assessee made an application dated 10.7.2006 u/s.195 (2) of the Act for issue of shares without deduction of tax at source in which the Assessee made a reference to its earlier application dated 17.10.2005 and also pointed out that, a certificate of nil deduction of tax at source had been granted by him by order dated 22.2.2005. On scrutiny of this application the AO came to know that the Assessee had issued equity shares of 4,21,400 on 30.3.2004, 17,24,800 on 30.9.2004, 21,56000 & 21,56,000 on 30.9.2005 and 31.3.2006 respectively to CIMAB without deduction of tax at source. The AO accordingly issued show cause notice u/s.201(1) of the Act asking the Assessee to show cause as to why he should be treated as an "Assessee in default" in respect of taxes not deducted at source (on the value of the shares) while issuing shares to CIMAB and also show cause notice u/s.201(1A) of the Act asking the Assessee to show cause why interest on tax not deducted from the date on which tax ought to have been deducted at source till the date on which taxes are paid to the Government should not be levied.
ITA Nos.507 to 510/Bang/2009 Page 7 of 56
12. According to the assessee, the consideration paid by it to CIMAB was for transfer of capital asset viz., "technology", which would be income chargeable under the head 'capital gains' falling within the exception contemplated by Explanation 2 to section 9(1)(vi) of the Act. The assessee's further contention was that even capital gains is not chargeable to tax in India because the transfer of the capital asset viz., the technology took place outside India and therefore section 45 of the Act read with sections 4 & 5 of the Act was not attracted. Hence there was no obligation to deduct tax at source.
13. According to the Revenue, the value of the shares issued by the assessee to CIMAB is nothing but consideration paid by a person resident in India in respect of any right, property or information used or services utilized for the purpose of business carried on by such person in India and therefore constitutes 'royalty' within the meaning of section 9(1)(vi)(b) read with Explanation 2 to section 9(1) of the Act. The AO accordingly passed orders treating the Assessee as an Assessee in default u/s.201(1) of the Act for taxes not deducted at source and also directing Assessee to pay interest u/s.201(1A) of the Act on taxes not deducted at source from the date on which tax ought to have been deducted at source till the date on which taxes are paid to the Government. The details of the orders so passed are as follows:
ITA Nos.507 to 510/Bang/2009 Page 8 of 56 Date of A.Y. No. of Value Date of Issue Shares order of AO 30.03.2004 04-05 4,21,400 42,14,000 22.12.2006 30.09.2004 05-06 17,24,800 1,72,48,000 22.12.2006 30.09.2005 06-07 21,56,000 2,15,60,000 20.12.2006 31.03.2006 06-07 21,56,000 2,15,60,000 04.04.2007 Note:
The order of the AO dated 22.12.2006 was a common order in respect of issue of shares on 30.3.3004 & 30.9.2004 without deduction of tax at source.
14. On appeal by the Assessee by a common order dated 25.2.2009 the CIT(A)-IV, Bangalore confirmed the orders dated 22.12.2006 & order dated 20.12.2006. By another separate order which is also dated 25.2.2009, the CIT(A)-IV, Bangalore confirmed the order dated 4.4.2007.
15. Aggrieved by the orders of the CIT(A), the Assessee has preferred the present appeals before the Tribunal. The four appeals relate to the four different dates on which shares were issued without deduction of tax at source for which orders were passed u/s.201(1) & 201(1A) of the Act.
16. The main issue that arises for consideration in these four appeals is as to whether there was an obligation on the part of the assessee to deduct tax at source, when the shares were issued to CIMAB u/s. 195 of the Act. India does not have a treaty for avoidance of Double Taxation with Cuba. Therefore, if income accrues to CIMAB in India under the Act, then the same would be taxable in India. The case of the revenue is that the receipt in the hands of CIMAB is "royalty" within the meaning of the Act, which has accrued and arisen to CIMAB in India and therefore taxable in India.
ITA Nos.507 to 510/Bang/2009 Page 9 of 56
17. Besides the main issue, several technical and legal objections on applicability of section 195 of the Act, rule of estoppel, delay in passing order us/. 195 of the Act and its other consequences have been raised by the assessee. We will deal with each of the above contentions of the assessee separately.
18. ISSUE NO.1: Whether the provisions of Sec.195(1) of the Act are not applicable when shares are issued to a Non-resident (which is a foreign company in the present case) because it cannot be said to be a payment of "any other sum chargeable under the provisions of this Act"
within the meaning of the said expression used in Sec.195(1) of the Act?
19. The argument of the learned counsel for the Assessee on the above issue was that Sec.195(1) of the Act casts obligation on the person responsible for paying to a non-resident, any other sum chargeable under the provisions of the Act, to deduct tax at source at the rates in force at the time of crediting such income to the account of the payee OR making payment by cash, cheque, draft or any other mode, whichever is earlier. It was his submission that when shares are issued in consideration for transfer of technology to CIMAB it is not a payment of "any other sum"
within the meaning of Sec.195(1) of the Act. According to him those provisions will apply only when payment or credit entry in the books of account are in connection with payment of money. It was his submission that the expression "any sum paid" has been interpreted by the Hon'ble Supreme Court in the case of H.H. Sri Rama Verma Vs. CIT 187 ITR 308 (SC) to mean only amount of money given as donations and not to ITA Nos.507 to 510/Bang/2009 Page 10 of 56 donations given in kind. It was submitted that the aforesaid reasoning will apply while interpreting the expression "any sum chargeable under the provisions of this Act" used in Sec.195(1) of the Act.
20. The learned DR submitted by him that the decision in the case of H.H. Sree Rama Varma (supra) was on the provisions of Sec.80-G of the Act which are different from the provisions of Sec.195 of the Act. He referred to the provisions of Sec.195(1) of the Act which reads as under:
"Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode,"
( emphasis supplied)
21. It was submitted by him that the section applies even to cases where shares are issued in discharge of a payment of sum of money to non- resident because of the use of the expression "by any other mode" used in Sec.195(1) of the Act. It was submitted that the fact that the sum of money payable to the non-resident is discharged by issue of shares of a particular value, is not relevant. It was submitted that CIMAB first agreed to give technology to the Assessee and the consideration for the same was fixed. The mode of payment of the consideration so fixed was in the form of equity shares. It was his submission that there were two transactions viz., sale of technology for consideration and receipt of the sale consideration in the form of shares. It was thus submitted by him that the issue of shares ITA Nos.507 to 510/Bang/2009 Page 11 of 56 by the Assessee to CIMAB falls within the parameters of Sec.195(1) of the Act and the Assessee ought to have deducted tax at source on the value of the shares so issued. The learned DR relied on the decision of the Hon'ble Supreme Court in the case of Kanchanchunga Sea Foods 325 ITR 540 (SC) wherein the question was whether income accrued in India to a Non- resident who had hired trawlers to an Indian company and the hire charges had to be quantified at 85% of the value of fish caught or 600000 US $ whichever is less. The Hon'ble Supreme Court held that the Indian company carried out fishing in economic zone of India and the charter fee was paid to non-resident equivalent to 85% of the value of the fish caught. The quantification was also done in India and therefore income accrues to non-resident in India. The learned DR laid emphasis on the point that even when consideration is quantified otherwise than in terms of money, income accrues or arises.
22. We have considered the rival submissions. Sec.80-G of the Act grants deduction while computing total income "any sums paid by the Assessee in the previous year as donation". The question before the Hon'ble Supreme Court in the case of H.H. Sree Rama Verma (supra) was as to whether donations in kind are also entitled to deduction u/s.80-G of the Act. The Hon'ble Supreme Court took note of the context in which the expression "sums paid by the Assessee" was used in Sec.80-G of the Act which gave deduction of the donations so made from total income of the Assessee and held that the said expression refers to money paid and not donations in kind. Sec.195(1) of the Act however is differently worded. It reads thus:
ITA Nos.507 to 510/Bang/2009 Page 12 of 56 "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode,"
(emphasis supplied)
23. As rightly contended by the learned DR, the expression "any other sum chargeable under the provisions of the Act" used in the earlier part of Sec.195(1) of the Act has to be read in conjunction with the words "at the time of credit of such income to the account of the payee or at the time of thereof in cash or by issue of a cheque or draft or by any other mode". Thus payment in terms of the money is not the only mode contemplated under the provisions of Sec.195(1) of the Act. The use of the expression "or by any other mode" in Sec.195(1) of the Act, makes the intention of the legislature clear that those provisions are attracted even to cases where payment is made otherwise than by money. We are therefore of the view that the argument canvassed by the Assessee cannot be accepted. Thus Issue No.1 is held against the Assessee.
24. ISSUE NO.2: Whether the issue of shares by the Assessee on 30.3.2004 and 30.9.2004 can be said to be covered by the order of non- deduction of tax at source issued by the AO in his order dated 22.2.2005 and therefore in respect of issue of shares on the above two dates the Assessee cannot be proceeded against u/s. 201(1) & 201(1A) of the Act?
ITA Nos.507 to 510/Bang/2009 Page 13 of 56
25. On this issue, the ld. counsel for the assessee submitted that the assessee filed an application u/s. 195(2) of the Act on 13.01.2005, a copy of which is at page Nos.338 to 348 of the assessee's paperbook. The application narrates various circumstances under which shares ought to be issued to CIMAB and that the consideration paid by the assessee to CIMAB in the form of shares is not a payment which could be said to be "royalty" within the meaning of the definition given in the Act. In the application, the assessee has prayed for grant of permission to issue equity shares against transfer of technology without deduction of tax at source. It should be mentioned here that this application was made by the assessee on 13.01.2005. Even prior to this date, the assessee had already issued 4,21,400 and 17,24,800 equity shares to CIMAB i.e., on 30.03.2004 and 30.09.04 respectively. There is no reference to the fact that certain shares had already been issued to CIMAB in its application dated 13.01.2005. The Assessing Officer passed an order dated 22.02.2005, a copy of the same is at pages 333 & 334 of the assessee's paperbook. The AO in this order, purported to have been passed u/s. 195(2) of the Act, was of the view that the assessee's stand that issue of shares against of transfer of technology would be in the nature of capital contribution of CIMAB and CIMAB would not earn any income was correct. The concluding portion of the order of the AO reads as under:-
"In view of the above, I hereby authorise the applicant to issues equity shares against transfer of technology without deduction of tax at source.
This order will be effective for issues of shares against the transfer of technology under the joint venture agreement filed with us. This certificate is provisional and is subject to final ITA Nos.507 to 510/Bang/2009 Page 14 of 56 assessment proceedings. This certificate is issued at the request of the application and as per present provisions of the law. This order will be effective for the issue of shares made upto 31st March 2005 unless it is cancelled with prior intimation to the applicant."
(emphasis supplied).
This order will not be operative for the issue of equity shares of 4,21,400 and 17,24,800 equity shares by the Assessee to CIMAB i.e., on 30.03.2004 and 30.09.04 respectively, because there is no reference in the application dated 13.01.2005 about the issue of shares on the aforesaid dates. It is pursuant to the application dated 13.1.2005 that the aforesaid order dated 22.2.2005 was passed by the AO. The learned counsel for the Assessee however relied on the decision of Hon'ble Mumbai bench decision in the case of MRPL 114 TTJ 632 (Mum). That was a case in which order u/s.195 of the Act permitting "nil" deduction of tax at source subsisted at all point of time when payments were made to the non-resident, unlike the present case where such an order did not subsist when payments (shares were issued) were made.
26. It was contended by the ld. counsel for the assessee that since the AO has passed an order u/s. 195(2) of the Act allowing the assessee to issue shares without tax deduction at source, the issue of shares made by the assessee on 30.03.2004 and 30.09.2004 cannot be the subject-matter of proceedings u/s. 201(1) & 201(1A) of the Act. In this regard, the ld. counsel for the assessee brought to our notice the decision of the Hon'ble Karnataka High Court in the case of CIT v. Bovis Lendlease (India) ITA Nos.507 to 510/Bang/2009 Page 15 of 56 Pvt. Ltd. dated 16.03.2012 in ITA No.15 to 22/2010, wherein the Hon'ble Karnataka High Court made the following observations:-
"As is clear from Sub-Section (2) of Section 195 of the Act ,if the person responsible for paying any amount chargeable under this Act to a non-resident, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the assessing officer to determine the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted under Sub-Section (1) only on that proportion of the sum which is so chargeable. However, if the assessing authority is of the view that no tax is chargeable, a certificate to that effect could be issued to the person responsible for making payment. Once a certificate is issued, the liability of the person responsible for paying under the aforesaid provision ceases and without any deduction he may make the payment to the non-resident. Insofar as Section 197 is concerned it provides for a similar application being made by the recipient of the income. On such an application being made under Section 197(1), the assessing officer can give to him such certificate as may be appropriate. If such certificate states no tax is deductible, until such certificate is cancelled by the assessing officer, the person responsible for paying the income is under "No obligation" to deduct tax while making payment. In fact the language employed is "Shall". Therefore, it is mandatory in nature. What is the effect of such a certificate was the subject matter of interpretation."
"When LLAH approached the Assessing Officer and made the aforesaid representation, a certificate under Section 197(1) came to be issued. On the fact of the certificate issued under Section 197(1) being made available to the assessee by LLAH, the assessee could not have deducted tax at source. Therefore, he cannot be treated as a defaulter under law. He is not an assessee in default as understood under Section 201 of the Act.
17. Therefore, the entire proceeding initiated on that basis is unsustainable, illegal and the Tribunal was justified in setting aside the same."
Therefore, in the facts of the case, the authorities were estopped from initiating proceedings under Section 201 of the Act.
ITA Nos.507 to 510/Bang/2009 Page 16 of 56 Therefore, the substantial questions of law are answered in favour of the assessee and against the revenue."
27. Further reference was also made to the decision of the Mumbai Special Bench of the ITAT in the case of Mangalore Refineries & Chemicals Ltd. v. DDIT, 114 TTJ 632, wherein it was held that when a NOC is issued by the AO for remittance without TDS, the assessee cannot be treated as in default u/s 201 of the Act.
28. The ld. DR on the above aspect submitted that the assessee made the application u/s. 195(2) of the Act on 13.01.2005. Prior to making such an application, the assessee has already issued shares to CIMAB on 30.03.2004 and 30.09.2004. It was his submission that in respect of shares issued prior to the application u/s. 195(2) of the Act, the order u/s. 195(2) of the Act dated 22.02.2005 will not operate. In this regard, the ld. DR relied on the order of the CIT(Appeals).
29. We have considered the rival submissions. We are of the view that the contentions put forth on behalf of the assessee cannot be accepted. In this regard, we find that in the application filed by the assessee on 13.01.2005 u/s. 195(2) of the Act, there is no reference to the shares having already been issued by the assessee to CIMAB on 30.03.2004 and 30.09.2004. The order u/s. 195(2) of the Act does not grant immunity to the shares which are already issued prior to the date of application u/s. 195(2) of the Act by the assessee. The order, if at all, can be valid for issue of shares between 22.02.2005 [the date of order u/s. 195(2) of the Act] and 31.03.2005. Admittedly, during the above period, the assessee had not ITA Nos.507 to 510/Bang/2009 Page 17 of 56 issued any shares to CIMAB, therefore it cannot be said that the assessee cannot be treated as an assessee in default in respect of issue of shares to CIMAB for failure to deduct tax at source.
30. Apart from the above, we also find that u/s. 195(2) of the Act, the power to make an application in respect of payments to a non-resident is where the payer considers that the whole of the payment will not be income chargeable in the case of the recipient. The payer can only call upon the AO to determine the appropriate proportion of sum chargeable to tax in India and the tax that the payer has to deduct on that proportion which is chargeable to tax in India. The provisions of Sec.195 of the Act is reproduced for the sake of better appreciation and clarity and it reads thus:
"SECTION 195: Other sums.: (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries"
shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode :
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation : For the purposes of this section, where any interest or other sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
ITA Nos.507 to 510/Bang/2009 Page 18 of 56 Explanation 2.--For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has--
(i) a residence or place of business or business connection in India; or
(ii) any other presence in any manner whatsoever in India.
(2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules made under sub-section (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under sub-
section (1).
(4) A certificate granted under sub-section (3) shall remain in force till the expiry of period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.
(5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.
(6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.
ITA Nos.507 to 510/Bang/2009 Page 19 of 56 (7) Notwithstanding anything contained in sub-section (1) and sub- section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a non-resident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determination, tax shall be deducted under sub-section (1) on that proportion of the sum which is so chargeable."
As we have already noticed, in the present case, the assessee has made an application for NIL deduction of tax at source. Such application can be made only by a payee u/s. 195(3) of the Act. When an application is made u/s. 195(2) of the Act, the AO cannot assume jurisdiction to hold that the entire payment is not chargeable to tax and the payer need not deduct tax at source.
31. According to the ld. Counsel for the assessee, the objective of section 195 is to avoid revenue loss as a result of tax liability of a non- resident. According to him, if taxes are withheld on payments which are not chargeable to tax, that would result in excess remittance of taxes. According to him, tax deduction cannot extend beyond the primary levy of tax. According to him, if excess taxes are deducted, then there would be a requirement of applying for refund of excess tax deducted at source. To avoid two way traffic of paying taxes and then claiming refund, it should be possible for a payer to apply for a Nil deduction of tax at source. It is the stand of the assessee that section 195(2) of the Act provides that when the person responsible for paying any sum chargeable under this Act to a non- resident, considers that the whole of such sum would not be income chargeable in the case of the recipient. According to him, the above ITA Nos.507 to 510/Bang/2009 Page 20 of 56 expression used in section 195(2) of the Act contemplates a situation where the payer can also make an application for a Nil deduction of tax at source. We are of the view that the above submission of the assessee is without any basis. The provisions of section 195(2) have to be read in its entirety and the later portion of section 195(2) of the Act authorizes the payer to make an application to determine the appropriate proportion of such sum which is chargeable to tax. It is not possible to read the first part of section 195(2) in isolation and it has to be read to the later part of section 195(2) of the Act. In view of the clear language of the provisions of section 195(2) of the Act, we do not think it necessary to elaborate on the submissions made by the ld. Counsel for the assessee by drawing analogy to various provisions in the Act and case laws referred to in this regard. In none of the case laws elaborated by the ld. Counsel for the assessee in his written submissions deal with the scope of section 195(2) in the context of a payer making an application for Nil deduction of tax at source. We are of the view that the submissions made by the assessee in the written submissions are a desperate attempt to justify the Nil deduction of tax granted by the AO which fortunately for the revenue did not operate at the relevant point of time when the assessee issued shares to CIMAB.
32. The question for consideration would be as to what is the effect of the order dated 22.02.2005 passed by the Assessing Officer u/s. 195(2) of the Act holding that no tax is deductible by the payer. In our view, when there is no power u/s. 195(2) of the Act to hold that no tax is deductible at source, on an application filed by the person making payment to a non- resident, the order passed by the AO holding that no tax is deductible at ITA Nos.507 to 510/Bang/2009 Page 21 of 56 source would be non est in law. In fact, this aspect is clear from the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., 327 ITR 456 (SC), wherein the Hon'ble Supreme Court has observed that section 195(2) provides a remedy by which a person may seek determination of the appropriate proportion of such sum so chargeable, where a proportion of the sum so chargeable is liable to tax. The Hon'ble Supreme Court has also observed that an application u/s. 195(2) presupposes that the person responsible for making the payment to a non-resident is in no doubt that tax is payable in respect of the some part of the amount to be remitted to a non-resident, but is not sure as to what should be portion so taxable or is not sure as to the amount of tax to be deducted. It is thus clear from the aforesaid observations of the Hon'ble Supreme Court that the payer cannot ask for a non-deduction of tax at source u/s. 195(2) of the Act.
33. The sum and substance of the submission made by the ld. Counsel for the assessee on the above aspect was that an order passed even without authority of law is a valid order and needs to be set aside in a manner known to law and till such time, it is done so, the same is binding. We do not think that the proposition canvassed by the ld. Counsel for the assessee can be accepted. There cannot be an estoppel against statute. The AO derives his powers by virtue of various provisions contained in the Act. If u/s. 195(2) of the Act, the AO does not have a power to issue a Nil deduction of tax at source on an application filed by the payer, then it would not be proper to say that an order given in contravention of those provisions would be binding on the revenue authorities. Apart from the ITA Nos.507 to 510/Bang/2009 Page 22 of 56 above, in the present case, factually the order dated 22.02.2005 issued by the AO u/s. 195(2) of the Act did not operate or was not in force for any of the issue of shares made by the assessee non-resident CIMAB. This contention therefore is devoid of merits and in any event, does not arise for consideration in the present proceedings. In that view of the matter, we are of the view that there is no merit in the contentions put forth by the assessee before us. Therefore Issue No.2 is decided against the Assessee.
34. ISSUE NO.3: Whether the Revenue is precluded from proceeding against the Assessee for failure to deduct tax at source u/s.201(1) of the Act, in respect of issue of shares made on 30.9.2005 and 31.3.2006 by reason of the application of principle of estoppel? Alternatively, can it be said that because the Revenue did not dispose the application of the Assessee u/s.195(2) of the Act, within a reasonable time, the permission prayed for is deemed to have been granted?
35. The next contention of the ld. counsel for the assessee was that in respect of issue of shares after 31.03.2005, the assessee made an application on 17.10.2005 and 10.07.2006 for issue of no tax deduction at source, that application was not disposed of the by the AO. It was submitted that in the light of the earlier view of the AO that there is no income chargeable to tax in the hands of the non-resident in India, the assessee entertained a belief that there was no requirement of tax deduction at source. It was therefore submitted that in respect of shares issued by the assessee on 30.09.2005 and 31.03.2006, the assessee did ITA Nos.507 to 510/Bang/2009 Page 23 of 56 not deduct tax at source. It was argued that the revenue is precluded from initiating proceedings u/s.201(1) of the Act on the principle of estoppel.
36. On the alternative issue, it was submitted that on the failure on the part of the AO to pass an order on the assessee's application u/s. 195(2) of the Act, the assessee can presume that the request made by it must be granted. In this regard, reliance was placed on the decision of the Delhi Special Bench of the Tribunal in the case of Bhagwad Swarup Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust v. CIT, 299 ITR (AT) 161 (DEL) (SB). It was further submitted that as per the CBDT Circular No.774 dated 17.03.2009, an application u/s. 197(1) should not be acted upon if the same is submitted after payment. It was thus submitted that pursuant to the assessee's application dated 17.10.2005 and 10.07.2006, the impugned orders u/s. 195(2) of the Act was passed. It was argued that since the assessee's application u/s. 195(2) were made after the issue of shares to CIMAB, the AO could not have acted on those applications and passed the impugned orders u/s. 195(2) of the Act and the AO's action is contrary to the CBDT Circular No.774 dated 17.03.2009.
37. We have considered the above submissions and are of the view that the same are without merit. As already stated, the order u/s. 195(2) dated 22.02.2005 is non est in law and therefore the assessee cannot be heard to say that he acted on the basis of the said order. Moreover, u/s. 195(1) of the Act, the assessee was obliged to deduct tax at source while making payments to the non-resident. If the assessee fails to do so and ultimately if it is found that the assessee was obliged to deduct tax at source, then the ITA Nos.507 to 510/Bang/2009 Page 24 of 56 plea of estoppel cannot be raised by the assessee. Of course the Assessee is entitled to make his own assessment regarding the chargeability to tax of a payment and urge that the payment in question is not chargeable to tax and make remittances without deduction of tax at source. If that contention is not ultimately accepted then the Assessee has to face the consequences in law which, apart from other consequences, includes action u/s.201(1) and 201(1A) of the Act. Under Sec.195 (2) of the Act, the determination is in respect of each payments made to a non- resident or foreign company. The AO can pass a general or special order on such application. The order dated 22.2.2005 cannot be said to be general order so as to be valid for all future issue of shares. We have already extracted in the earlier part of this order the operative portion of the order dated 22.2.2005, which clearly specifies that it is valid only for issue of shares upto 31.3.2005. This order was in response to the Assessee's application dated 13.1.2005 in which the Assessee did not disclose the facts regarding issue of shares to CIMAB on 30.3.2004 and 30.9.2004. Therefore the Assessee cannot take any benefit under the order dated 22.2.2005 for any issue of shares to CIMAB.
38. As already stated the order dated 22.2.2005 is not in accordance with law because that order which was passed u/s.195(2) of the Act, was in response to an application by the person responsible for making payment in which the dispute can be only with regard to the rate of tax and not the question whether tax at all is deductible at source or not, which remedy is available only to the recipient of the payment u/s.195(3) or 197 of the Act. Law is well settled that there cannot be an estoppel against a statute. The ITA Nos.507 to 510/Bang/2009 Page 25 of 56 CBDT Circular No.774 dated 17.3.1999 referred to by the ld. counsel for the assessee will not have any operation to the present case, as the provisions of section 197 are not attracted in the present case at all. Reliance placed by the ld. counsel for the assessee on the decision of the Delhi Special Bench of the Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmatrth Dham (supra) is also misplaced because there is no time limit within which an order u/s. 195(2) is to be passed. Apart from the above, the Special Bench took note of the fact that grant of Registration u/s.12A of the Act does not preclude the AO, while assessing the charitable trust from rejecting a claim for exemption u/s.11 of the Act, if it is found that there is no application of income for charitable purpose. Such avenues are not open in the case of proceedings u/s.201(1) & 201(1A) of the Act.
39. For all the above reasons, we reject the arguments put forth by the ld. counsel for the assessee on issue No.3 and hold against the Assessee on the said issue.
40. ISSUE NO.4: Can it be said that proceedings u/s.201(1) & 201(1A) of the Act are not valid on the application of the principle "Actus Curle Neminem Gravabit", which means "an act of Court shall prejudice no man".?
41. The next argument of the learned counsel for the Assessee is based on the equitable doctrine "Actus Curle Neminem Gravabit" which means, an act of Court shall prejudice no man. The learned counsel for the Assessee on the above issue submitted that the above maxim will equally ITA Nos.507 to 510/Bang/2009 Page 26 of 56 apply to quasi-judicial authorities discharging quasi-judicial functions. He points out that because of the order dated 22.2.2005 permitting issue of shares to CIMAB without deduction of tax at source, the Assessee entertained belief that there was no need to without tax at source on issue of shares to CIMAB and according issued shares to CIMAB without deduction of tax at source. It was contended that, if at this stage, tax liability is sought to be fastened on the Assessee because of the act of the Revenue, than that would prejudice the Assessee. The Assessee thus submits that on an application of the above principle, the proceedings u/s.201(1) & 201(1A) of the Act should be held to be bad in law.
42. We have considered the above submission and are of the view that the same cannot be accepted. It is well settled that Tax and equity are strangers. In interpreting tax legislations or determining tax liability equitable considerations have no role to play. The provisions of Sec.195 of the Act are clear and are not ambiguous. As already stated the order u/s.195(2) dated 22.2.2005 operated only for a limited period. Fortunately for the revenue during that period, the Assessee made no issue of shares to CIMAB. The provisions of law are clear that each of the payments to non-resident or foreign company requires specific order, unless there is any other general order operating for an indefinite period of time. We therefore reject the arguments advanced on this issue and hold against the Assessee on issue No.4.
43. ISSUE NO.5: Whether the issue of shares by the Assessee to CIMAB would constitute a payment of "Royalty" by the Assessee to CIMAB ITA Nos.507 to 510/Bang/2009 Page 27 of 56 which can be said to accrue or arise in India to CIMAB and therefore taxable in the hands of CIMAB in India and consequently the Assessee be held as liable to treated as an Assessee in default u/s.201(1) of the Act?
44. Another issue that may require consideration as an alternate to the above issue will be as to whether CIMAB is liable to tax on capital gain on transfer of technology. Consequently, whether assessee can be said to be 'an assessee in default' to the extent of tax on capital gain?
45. On the above issues, the first aspect to be seen is the definition of "royalty" under the Act. The second aspect to be seen is the terms of the JVA and the TTA.
46. "Royalty" is defined by Expln.-2 to Sec.9(1)(vi) of the Act, as under:-
'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, secret formula or process or trade-mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade-mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
ITA Nos.507 to 510/Bang/2009 Page 28 of 56 (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)."
47. As can be seen from the definition of "royalty" as contained in Explanation 2 to section 9(1)(vi) of the Act, consideration which would be income of the recipient chargeable under the head 'capital gains' are excluded. For application of the above exclusion clause, it is necessary that :-
(a) Technical know-how in question should be a capital asset in the hands of CIMAB.
(b) The said technical know-how should be capable of being transferred and should have been transferred by CIMAB during the previous year. The transfer should be one falling within the definition of 'transfer' as given in section 2(47) of the Act;
(c) The machinery provisions viz., the computation of capital gain as given in section 48 of the Act should be capable of being applied.
(d) The transfer of technical know-how should have taken place in India.
In the course of hearing we had specifically put it to the learned ITA Nos.507 to 510/Bang/2009 Page 29 of 56 counsel for the Assessee as to whether the Assessee made a claim before the AO that the transfer of technical know-how took place outside India. We also asked him as to how in his written submissions he claims that transfer of technology took place outside India and evidence if any to show that transfer of technology took place outside India. In his elaborate submissions filed after the hearing in which such queries were raised, there is no whisper on this aspect except a plea that situs of know-how would be Cuba and therefore the transfer of the know-how should also be considered as having taken place outside India. We will deal with this aspect later. If the exclusion clause is not found to be applicable in the present case, then we have to examine as to whether any of the clauses referred to in Explanation 2 to section 9(1)(vi) of the Act are attracted. The AO proceeded on the footing that clause (i) and clause (ii) of Explanation 2 to section 9(1)(vi) of the Act would be attracted and this conclusion is based on certain terms of the terms of the TTA. The CIT(A)'s order is silent on which clause of Explanation 2 to section 9(1)(vi) will apply, but he seems to be in agreement with the conclusions of the AO.
48. We shall now look at the terms of Joint Venture Agreement (JVA) dated 22.02.2002 between CIMAB and BIL. It is pursuant to this agreement that the assessee company was incorporated. We shall now refer to the terms of the agreement. An Indian company by name 'M/s. Biocon India Ltd.,' registered under the Companies Act, 1956 [hereinafter called as "BIOCON"] is a pioneer in biotechnology and was engaged in the ITA Nos.507 to 510/Bang/2009 Page 30 of 56 manufacture and marketing of various enzymes, active pharmaceutical ingredients and specialty chemicals.
49. CIMAB SA, Cuba [hereinafter referred to as "CIMAB"] is a Cuban company engaged in research, development, manufacturing and marketing of biopharmaceuticals. CIMAB had developed technology for some products which are necessary for manufacture of drugs for treatment of cancer. "Technology" means (this is how "Technology has been defined in the JVA) :-
(a) know-how viz,, information required for scientific, technical and technological evaluation of production of the products;
(b) technical information viz., information, whether patented or acquired by CIMAB relating to manufacture of products on commercial scale;
and
(c) technical assistance i.e., assistance to transfer technology. Thus "technology" developed by CIMAB has the above three ingredients.
50. BIOCON and CIMAB entered into a joint venture agreement dated 22.02.2002 (JVA) whereby they agreed to form a joint venture company (JVC) in India. As per the JVA, BIOCON as its part of capital contribution to the joint venture company to be formed, agreed to incur cost of constructing/securing the biotechnological plant and circulating capital of the joint venture company for beginning the production and first operation of the joint venture company. CIMAB on its part towards capital contribution to the joint venture company to be formed agreed to transfer ITA Nos.507 to 510/Bang/2009 Page 31 of 56 technology in respect of some products. It was agreed that the investment to be made by BIOCON will be equivalent to 51% of the paid-up capital of the JVC and the value of the technology brought in by CIMAB would be equivalent to 49% of the paid-up capital of the JVC. The paid-up capital of the JVC was dependent on the capital for constructing/securing the Biotechnological Plant and circulating funds for beginning the production and first operation of the JVC and all these had to be borne by BIOCON as its share of capital contribution to the JVC. The cost so borne will be 51% of the issued, subscribed and paid up capital of the JVC and based on the above 49% of the paid-up capital had to be allotted to CIMAB which will be the value of the technology brought in by CIMAB for use by the JVC.
51. Under clause 2.1 of the JVA it is provided that the JVC will manufacture cancer drugs using the technology developed by CIMAB The JVA in Clause 11 provides as follows:-
"Article 11. Technology Transfer 11.1 The Technology that CIMAB will transfer to JVC in terms of this JVA shall consist of consist in the following:
11.1.1 The Technical Information, including the Know-how for production and the entire documentation required for making possible the manufacture of the Product as per the specifications, to be finalized and signed off as Annexure 4 in a supplement agreement to be executed within 60 days of execution of this JVA.
11.1.2 The conceptual design required for the project for basic solution engineering needed for building and erecting the Biotechnological Plant in accordance with scope as determined in this JVA.
11.1.3 The project for basic engineering solution required for the detailed engineering project needed for building and ITA Nos.507 to 510/Bang/2009 Page 32 of 56 erecting the Biotechnological Plant in accordance with scopes determined in this JVA.
11.1.4 The training of selected BIOCON personnel required for manufacturing the Products. The training programme will be finalised and signed off as Annexure 2 in a supplement agreement to be executed within 60 days of execution of this JVA. The cost of such training will be borne by the JVC."
52. Clause 12.2 of the JVA provides for the responsibilities of CIMAB and it reads thus:-
"12.2 Responsibilities of CIMAB 12.2.1 To deliver the conceptual design according to the scope mentioned in the Annex to this JVA.
12.2.2 To deliver the projects of basic engineering of the Technology Transfer according to the scope of this JVA.
12.2.3 To deliver the documentation required and sufficient for applying the Technology as will be finalized and signed off as Annexure 5 in a supplement agreement to be executed within 60 days of execution of this JVA.
12.2.4 To fulfil the training and instruction programmes of the personnel specified in the Annexure 2 as referred to in [Article 11.1.4] of the JVA.
12.2.5 To provide the technical services and Technical Assistance specified in this JVA.
12.2.6 Obtain all approvals for transfer of know-how to JVC."
53. It can be seen from the aforesaid clause of the JVA, technology transfer (as per Clause-11 of the JVA) contemplates CIMAB
(a)providing the Technical Information, including the Know-how for production and the entire documentation required for making possible the manufacture of the Product as per the specifications.
ITA Nos.507 to 510/Bang/2009 Page 33 of 56
(b) Providing Design and Plan for putting up building and erecting the Biotechnological Plant.
(c) Providing Training of selected BIOCON personnel required for manufacturing the Products.
Under clause-12 of the JVA performance of obligation referred to (a) above has to be by delivering the information the relevant information, obligation referred to (b) above by delivering the design and plan and (c) above by fulfill the training and instruction programme.
54. As can be seen from clauses 11 and 12 of the JVA, there is a reference to Annexures 4, 2 and 5 to the agreement. These Annexures were superseded by a Technology Transfer Agreement (TTA) dated 03.12.2003. The terms of this Agreement need to be seen carefully, as these terms will throw light on what is transferred by CIMAB to the assessee. In the preamble to this Agreement, CIMAB claims that it owns right to transfer technology in relation to commercial manufacture and marketing of products [viz., (a) Human Recombination Crythroposeon, (b) Granulocyte Colony Stimulating factor, and (c) TheraCIM hR3 Humanised Monoclonal Antibody against Epidermal Growth factor receptor]. It is further mentioned that the same is being transferred in terms of the said Agreement to the assessee. The area for which transfer was valid is India for products (a) and (b). For product (c), the area is India, Bangladesh, Bhutan, Nepal, Pakistan and Sri Lanka. Technology has been defined in clause 1.14 of this Agreement as follows:-
ITA Nos.507 to 510/Bang/2009 Page 34 of 56 "1.14 "Technology" shall mean (i) conceptual and basic engineering for the Facility based on current Good Manufacturing Practice (cGMP) (ii) procurement, construction, design, assembly, start-up and managing of the Facility (iii) confidential information related to the manufacturing of the Products (iv) the patents including information contained in the patents relating to the Products, manufacture of the Products and the Technology and shall include Improvement, Know How, Technical Advise and Technical Information."
55. Clause 2.2 of the Agreement says that the scope of technology transferred is detailed in Annexure-3 to the Agreement. Annexure-3 to the Agreement contains a big list of activities. To put it in a nutshell, it envisages giving of complete details of the building, plant to be erected, complete process of manufacturing the product, technical details, quality control, standard operating procedure, preclinical trials, clinical studies etc. The technology as contained in Annexure-3 in the form of literature has to be delivered by CIMAB to the assessee. The Agreement is silent as to the place at which the same is to be delivered. This will be material because if the transfer of technology is held to be a transfer of a capital asset, then it would be chargeable to tax if delivery of literature by CIMAB to the assessee is in India. The provisions of section 45 of the Act would then get attracted. Article-5 of this Agreement provides as follows:-
"Article 5 Technical Advise 5.1 During the term of the JVA, CIMAB will lend Technical
Advise to BBPL at the request of BBPL and with previous written agreement between the Parties.
5.2 The specific scope of the Technical Advise is detailed in the Appendix 3 to this Agreement.
5.3 For accomplishing of the Technical Advise, CIMAB shall:
ITA Nos.507 to 510/Bang/2009 Page 35 of 56
a) advise on the manufacturing facility design, equipment evaluation and selection, plant construction, plant installation and start up
b) advise on the production processes for the Products production and their storage.
c) advise on the quality control processes for the Products production and their storage.
d) advise on the clean room management and control
e) to train the key BBPL specialists and technicians at the Centre of Molecular Immunology as detailed in the Appendix No.4 to this Agreement.
f) to send Cuban technicians and specialists as detailed in the Appendix No.5 to this Agreement.
5.4 BBPL shall bear the reasonable travel, boarding and lodging expenses according to the terms agreed by the Board of Directors of BBPL for the technicians, specialists or qualified experts who travel to BBPL to provide Technical Advise."
56. Appendix 4 to the agreement gives a list of the scope of technical advise. Technical Advise includes the personnel of CIMAB coming to India and rendering assistance in the pre and post-production of the products. The above clauses in the JVA & TTA make it clear that apart from know- how CIMAB was also required to render Technical Service in India.
57. We should keep in mind that there can be mixed contract for supply of know-how and technical services in consideration of lump sum payment. The lump sum consideration must be broken down into parts and that part of the consideration attributable to know-how has to be brought to tax as 'royalty' assuming that the consideration paid is for imparting of any information concerning technical, industrial, commercial or scientific ITA Nos.507 to 510/Bang/2009 Page 36 of 56 knowledge, experience or skill. That part of the consideration attributable to providing 'technical services' has to be brought to tax as fees for technical services rendered. Such apportionment has to be on the basis of the information specified in the contract itself or on some other reasonable basis. If, however, one element constitutes 'by the principal purpose of the contract' and the other element is "only of an ancillary and largely unimportant character", the whole amount paid should be treated as relating to the primary element.
58. Keeping in mind the observations in the earlier paragraphs, let us see as to whether in the case of the assessee, there was a "transfer of know-how" which would be chargeable to tax as capital gain (subject to fulfillment of other conditions mentioned in section 45 of the Act) or only a "right to use know-how" falling within the definition of Explanation 2 (iv) of section 9(1)(vi) of the Act or a mixed contract where there is right to use know-how as well as technical services rendered.
59. We will now refer to certain other clauses in the TTA:-
"Article 3 Guarantees & Responsibility 3.1 CIMAB guarantees and warrants that it has the unrestricted rights to transfer the Technology and warrants that to best of its knowledge the Technology does not infringe any Third Party rights and patents existing as on Effective Date within the Territory. CIMAB will provide a "Freedom to Operate" Opinion, related to other territories to Biocon in relation to the Technology.
3.2 CIMAB guarantees that the Technology transferred to BBPL is accurate, complete, updated in all aspects to enable BBPL to set up the Facility and manufacture and market the Products on a commercially viable scale.
ITA Nos.507 to 510/Bang/2009 Page 37 of 56 3.3 CIMAB guarantees that the Technical Advise that will be offered to the personnel of the BBPL will be not in any manner deficient and or lesser/inferior to that which the CIMAB offers to their own personnel and shall be accurate, complete, updated in all aspects to enable BBPL to set up the Facility and manufacture and marketing the Products on a commercially viable scale.
3.4 BBPL guarantees that in order to assimilate the Technology the Facility will have the equipment and the services required, in terms of this Agreement.
3.5 BBPL shall guarantee the quality of the Products manufactured will be in conformity to the Technology transferred by the CIMAB.
3.6 BBPL guarantees that the Technology will not be copied or revealed to any Third Party except its employees and agents and those of Biocon and except as required by regulatory authorities and or by law.
Article 4 Patents 4.2 If CIMAB has patented the Improvement/Improvements, CIMAB will grant a royalty free license to BBPL in perpetuity subject to BBPL agreeing that during the term of this Agreement it will not disclose/transfer/licence the same to any Third Party (excluding regulatory authorities), except on such terms as may be mutually agreed between BPPL and CIMAB.
4.3 If BPPL has patented the Improvement/Improvements, BBPL will grant a royalty free license to BBPL in perpetuity subject to CIMAB agreeing that during the term of this Agreement it will not disclose/transfer/licence the same to any Third Party (excluding regulatory authorities), except on such terms as may be mutually agreed between BPPL and CIMAB.
Article 6 Improvement & Improvements 6.2 Any Improvement or Improvements made in the Territory by BBPL will be property of BBPL and shall be licenced royalty free in perpetuity to CIMAB outside the Territory subject to CIMAB agreeing that during the term of this Agreement CIMAB will not disclose/transfer/licence the same to any Third Party (excluding regulatory authorities), except on such terms as may be mutually agreed between BPPL and CIMAB.
ITA Nos.507 to 510/Bang/2009 Page 38 of 56 Article 7 Confidentiality 7.1 During the term of this Agreement, all the Technology, as well as data, instructions and any other information related to them and supplied or to be supplied by the CIMAB to BBPL shall be only used by BBPL (i) in the Facility for manufacture and marketing of the Products and (ii) as per the terms of this Agreement, and shall be considered and treated as confidential information.
7.2 During the term of this Agreement, BBPL won't reveal the information arising from CIMAB to any person, except to the responsible and qualified employees of the BBPL and Biocon necessary for the due operation of the Facility and except as required by regulatory authorities and or by law. BBPL will be responsible for any unauthorized disclosure of the information by their employees.
7.3 During the term of this Agreement, save and except as otherwise agreed in writing, BPPL will not disclose it or communicate the Technology to any Third Party."
Article 9 Assignment This Assignment can not be assigned by one Party unless it receive the prior written consent of the other Party."
60. From a perusal of the aforesaid clauses-3, 4, 6, 7 & 9 in the TT Agreement, it is clear that there was no transfer of the know-how by CIMAB to the assessee. Article 3.6 of the Agreement clearly provides that the assessee will not copy or reveal technology to third parties. Article 4 clearly gives right to Patent to the party who makes improvement to the technology. Article 7 clearly provides that the know-how can only be used by the assessee. The assessee cannot claim right of ownership for the same even in the territories in which it had a right to use the know-how. Article-9 of the Agreement provides that the assessee has no right even to assign the rights under the Agreement. In pith and substance, the ITA Nos.507 to 510/Bang/2009 Page 39 of 56 Agreement gives only a right to use the know-how, though the nomenclature used in the Agreement is 'transfer of technology'. Nomenclature used to describe an agreement will not be decisive and we have to decide in substance what is the right transferred. It is thus clear from the terms of this Agreement that the assessee did not acquire the know-how through a transfer within the meaning of section 2(47) of the Act from CIMAB and therefore the arguments of the assessee on the arguments resulting in a transfer of know-how deserve to be rejected. The JVA read together with the JVA contains two parts. The first part transfers right to use know-how. This part is a separate contract and the right to use know-how so transferred was "Royalty" within the Explanation 2(iv) to section 9(1)(vi) of the Act. The second part is the mode of payment of the consideration payable under the JVA & TTA for providing technology by CIMAB to the assesse (right to use the know-how) which is in the form of issue of shares in the JVC. Accrual of income from the second part of the contract has to be brought to tax subject to fulfillment of conditions specified in section 9(1)(vi) of the Act. The fact that the consideration payable under the Agreement is discharged by issue of shares in a JVC will have no effect on accrual of income in India and its taxability in India.
61. Having held that there was a right to use the technology falling within the section 9(1)(vi) Explanation 2(iv) of the Act by the assessee for which payments were made to CIMAB, we need to see as to whether the JVA read with TTA is a composite contract by which the right to use the know- how was provided together with technical services. This exercise, in our view, need not be carried out for the reason that both royalty and fees for ITA Nos.507 to 510/Bang/2009 Page 40 of 56 technical services are taxed at the same rates under the Act. Expln.-2 to Sec.9(1)(vii) of the Act defines Fees for Technical Services as follows:
"Explanation 2 : For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
62. As we have already noticed, under the JVC "Technology" has been has been defined as :-
(a) know-how viz,, information required for scientific, technical and technological evaluation of production of the products;
(b) technical information viz., information, whether patented or acquired by CIMAB relating to manufacture of products on commercial scale;
and
(c) technical assistance i.e., assistance to transfer technology. Technical assistance for transfer of technology as understood in the JVA would include supervision by personnel of CIMAB deputed for the purpose to set up the Plant in India. This is clear from Article 11.2 of the JVA which specifically provides that CIMAB shall supervise the detailed engineering and construction of the Biotechnology Plant and equipment purchase. The expenditure for travel of personnel of CIMAB for this purpose has to be met by the Assessee. This is clear from a reading of Clause 5.4 of the TTA. Thus the lump sum consideration agreed to be paid to CIMAB is not only for the right to use the know-how but also for providing technical services.
ITA Nos.507 to 510/Bang/2009 Page 41 of 56
63. As already stated, in the present case, we need not indulge in any exercise of breaking up of the consideration as attributable to Royalty or Fees for Technical services because of the uniform rate of tax on both Royalty and Fees for Technical services. Circular No.461 dated 9.7.1986 makes this position very clear. It reads thus:
"CIRCULAR NO. 461 DATED 9TH JULY, 1986 Explanatory notes on the provisions of the Finance Act, 1986 NON-RESIDENTS SECTION 115A Uniform rate of tax on royalty and fees for technical services in the case of foreign companies 34.1 Under the existing provisions of s. 115A of the IT Act, the amount of income-tax payable on the gross amount of income by way of royalty or fees for technical services received by a foreign company from an Indian concern or from Government is as under :
(i) twenty per cent of such income as consists of lump sum consideration for the transfer outside India of the technical know-
how;
(ii) forty per cent on the balance of such income.
34.2 The basis for the aforesaid flat rates of tax on royalty and fees for technical services was a sample study made by the IT Department, prior to the enactment of these provisions w.e.f. 1st June, 1976, which showed that the expenses claimed against royalty income, (then being taxed at the rate of fifty per cent on net basis) were around twenty per cent and hence the flat rate of tax at forty per cent was determined. In view of the position that the lump sum consideration paid to foreign companies for the supply of technical know-how, drawings, designs and documentation etc. abroad were not taxable prior to 1976, it was decided that such lump sum amount should be taxed at the concessional rate of twenty per cent of the gross amount of such payments.
34.3 It may be mentioned that when the provisions of s. 115A of the IT Act were enacted, it was felt that it might be difficult to segregate the royalty payment relating to the supply of know-how simpliciter from the payment relatable to the technical service. This is because of the fact that a number of our technical collaboration agreements envisage composite situations where the collaborator tenders various types of services of technical nature apart from making available patents and know- how. It had been apprehended at that time that a higher rate of tax on royalty might result in inflating fees ITA Nos.507 to 510/Bang/2009 Page 42 of 56 for technical services. Hence a uniform rate of tax of forty per cent for both royalty and technical services fees was prescribed. It may appear to be ironical that with the passage of time, the lower rate of tax at 20 per cent applicable to lump sum payments for supply of technical know-how abroad has given rise to the problems which had been apprehended relating to the royalty vis-a-vis fees for technical services. It has been found that the foreign collaborators tend to take more by way of lump sum which attracts lower rate of tax then by way of royalty and in some cases payments for grant of licence for use in India or technical process are camouflaged as lump sum payments abroad. This is also not in the interest of absorption and adaptation of imported technology. An agreement for transfer of technology in India is more conducive, when compared to an agreement for lump sum payment, to self-reliance in our industrial production. Further the differential rates of tax have been found to be open to abuse and have also given rise to litigation. Hence, by an amendment of s. 115A of the IT Act, the tax rate on lump sum payments has been increased from 20 per cent to 30 per cent and the tax rate on royalty payments and fees for technical services has been reduced from 40 per cent to 30 per cent. This will result also in reducing the cost of technology to Indian concerns thus enabling them to opt for the latest rather than intermediate technology and will encourage the absorption and adaptation of imported technology.
34.2 The amendment will apply in relation to the asst. yr. 1987- 88 and subsequent years."
64. The consideration paid by the Assessee was consideration paid for the following:
(i) Consideration paid which would fall within the ambit of Expln-2 (i) to Sec.9(1)(vi) of the Act viz., For 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. Know-how is not specifically referred to in this clause but it would be "similar property"
like secret formula or process. Even transfer of part of the right comprised in the bundle of rights which comprised in the intellectual property i.e., know-how, would be covered by the aforesaid clause.
(ii) Consideration paid for use of any patent, invention, model, design, secret formula or process or trade mark or similar property. As already stated, Know-how is not specifically referred to in this clause but it would be "similar property" like secret formula or process. Even transfer of part of the right comprised in the bundle of rights in the intellectual property i.e., know-how, would be covered by the aforesaid clause ITA Nos.507 to 510/Bang/2009 Page 43 of 56
(iii) Consideration paid for the imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill, falling within the ambit of Expln.-2(iv) to Sec.9(1)(vi) of the Act.
(iv) Consideration for conceptual design required for the project for basic solution engineering needed for building and erecting the biotechnological plant.
(v) Consideration for basic engineering solution required for the detailed engineering project needed for building and erecting the biotechnological plant.
(vi) Consideration for training of selected biocon personnel required for manufacturing the products.
(vii) Consideration paid for supervising the detailed engineering and construction of the biotechnology plant and equipment purchase.
65. Some of the obligations to be performed by CIMAB (referred to in
(iv) to (vii) above partake the character of FTS within the meaning of Sec.9(1)(vii) of the Act.
66. It should also be kept in mind that an Explanation to Sec.9 was substituted by finance Act, 2010 with retrospective effect from 1.6.1976.
"Explanation.--For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,--
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India."
We have made a reference to the above Explanation only to allay any apprehension regarding accrual of income in India.
67. Now we will deal with the other arguments of the learned counsel for the Assessee on the above issues. We have not dealt with the arguments ITA Nos.507 to 510/Bang/2009 Page 44 of 56 of the learned counsel for the Assessee earlier because factually, we have to examine the terms of the Joint venture agreement as well as the technology transfer agreement to find out the nature of rights that was subject matter of transfer. As we shall see later, the argument of the learned counsel for the Assessee proceeded on the assumption that there was an absolute transfer by way of sale of technology by CIMAB.
68. The learned counsel for Assessee has made very elaborate submissions in support of the Assessee's stand that what was transferred under the JVA and TTA was a capital asset and that the gain on such transfer is chargeable to tax under the head capital gain. This argument is based on Expln.-2 to Sec.9(1)(vi) of the Act which excludes "any consideration which would be the income of the recipient chargeable under the head "capital gain" " from the purview of the definition of royalty. His submission was that since the transfer of the capital asset had taken place outside India, the charging provisions of Sec.45 are not attracted and therefore capital gain is also not chargeable to tax in India.
69. The learned counsel for the Assessee submitted that the definition of the term "capital asset" u/s.2(14) of the Act is very wide. It means "property of any kind held by an Assessee" other than those specifically excluded. One of the items of exclusion is "stock-in-trade". In the JVA CIMAB is stated to be engaged in research, development, manufacturing and marketing of biopharmaceuticals. As to whether the technology transferred under the JVA and TTA would be stock-in-trade of CIMAB or not cannot be ascertained without the presence of CIMAB. This is another reason why ITA Nos.507 to 510/Bang/2009 Page 45 of 56 we feel that in proceedings u/s.195(1) of the Act, the person making payment cannot ask for a "nil" deduction of tax at source. For example if it is held that the receipt would constitute business income of the recipient as to whether the recipient has a permanent establishment in India or not cannot be decided in proceedings initiated by the person making payment as he cannot give the required details. In the present case, we cannot proceed under any assumption that technology is not "stock-in-trade" of CIMAB as was sought to be argued by the learned counsel for the Assessee. Another connected argument of the learned counsel for the Assessee was that even if one assumes that know-how was stock-in-trade of CIMAB, since it was brought in as capital contribution to the Joint Venture, it would cease to be stock-in-trade when it is brought in as capital contribution. In this regard the learned counsel for the Assessee relied on the decision of the Special Bench of ITAT, Delhi in the case of DLF Universal Ltd. Vs. DCIT 2010-TIOL-16-ITAT-Del-SB. In the aforesaid decision Special Bench held that the nature of the asset at the time it is contributed as capital to a partnership firm has to be seen. The question before the Hon'ble Special Bench arose in the context of applicability of Sec.45(3) of the Act when capital asset is introduced into a firm as capital contribution. The Special Bench, Delhi, held in a majority judgement that though S. 45 (3) applies when a capital asset is introduced into a firm as capital contribution, it will also apply when stock-in-trade is introduced into a firm because the transaction is on the capital account and stock-in-trade does not retain its character as stock-in-trade at the point of time of introduction. In that case, the assessee was engaged in the business of ITA Nos.507 to 510/Bang/2009 Page 46 of 56 real estate development. It held land as stock in trade with a book value of Rs. 4.4 crores. The said land was introduced at its market value of Rs. 11.50 crores as capital contribution into a new firm. The surplus of Rs. 6.01 crores was credited to the profit and loss account. The assessee relied on Hind Construction 83 ITR 211 (SC) and claimed that the surplus of Rs. 6.01 crores was not liable to tax as the introduction of an asset into a partnership was not a sale. It was also claimed that s. 45 (3) was applicable only to capital assets and not to stock-in-trade. However, the majority of the Special Bench held that section 45(3) did apply and that the said surplus was chargeable to tax. The fact that the assessee had revalued the stock- in-trade to its market value prior to the introduction into the firm was cited as a factor to show that the stock-in-trade (which is valued at cost) had been converted into a capital asset. On that facts of that case, the majority held that though the partnership was genuine, the assessee had adopted a calculated device of converting land into money by withdrawing substantial sums from the firm and debiting the same to its current account. It was held that the contribution by the assessee of its personal land to the share capital of the firm was a device or ruse for converting land into money for its benefit. It was opined that the entry of Rs. 11.50 crores being the value of land credited in assessee's capital account was not imaginary or notional and that it was chargeable to tax. We are of the view that the ratio laid down in the aforesaid decision cannot be applied to the present case as the issue was decided on the provisions of Sec.45(3) of the Act. The technology was given by CIMAB to a company that was to be formed and in lieu of payment of consideration for such transfer in terms of money, ITA Nos.507 to 510/Bang/2009 Page 47 of 56 shares had been issued in the company formed. We are of the view that the principles applicable in such cases will be to look at the transaction as comprising of two contracts. The first contract is one for sale of technology and the second contract is for the mode in which payment of consideration for sale of technology has to be discharged. We are therefore of the view that the aforesaid decision will not be of any assistance to the Assessee in the present case.
70. It was submitted ownership of know-how comprises of a bundle of rights viz., the right to use it exclusively and restricting others from using it, the right to part with such right in part including the right to use a part of the bundle of rights in a particular territory. It was argued that the Assessee had an absolute right to use the technology in India to the exclusion of others and to that extent the Assessee was absolute owner of the technology as far as India is concerned. It was submitted that there was transfer of a right to use the technology and any gain arising from such transfer has to be regarded as gain arising on transfer of a capital asset and therefore chargeable to tax under the head capital gain. It was submitted that since there was no transfer of capital asset in India there cannot be charge to tax on capital gain in India.
71. On the above submissions, we have already held that there was only a right to use and no absolute transfer of any of the bundle of rights which comprises the intellectual property right to the know-how. We therefore do not consider it necessary to elaborate on the various commentaries on Jurisprudence which were cited by the learned counsel ITA Nos.507 to 510/Bang/2009 Page 48 of 56 for the Assessee in his written submissions. Apart from the above, we have already seen the definition of "Royalty" under the Act. It applies even where there is a transfer of all or any rights (including granting of a licence) in respect of process or trademark or similar property.
72. The learned counsel for the Assessee placed strong reliance on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Ralliwolf Ltd. 143 ITR 720 (Bom). The Question that arose for consideration in this case was as to whether the value of 3,625 shares in the Indian company, Ralliwolf Ltd., of Rs. 100 each, issued to the non- resident assessee in consideration of supplying the drawings and information is of capital nature or of revenue nature. The Hon'ble Court held:-
"40 .....
...... The legal position on these authorities, therefore, is that know-how is not strictly a fixed asset and the nature of receipts from the know-how would essentially depend upon the transactions out of which the receipts arise and the context in which the receipts are received. If the imparting of know-how is really in the nature of services rendered without anything more, the receipt must be treated as a revenue receipt. But when consideration is received for imparting know-how in association with the disposal of a capital asset, then the receipt will have to be treated as a capital receipt....."
The Hon'ble Court thereafter found that the Tribunal held that the transaction was in substance a parting by Wolf company with its property for the purchase price, the property being its connection or goodwill in India and its fund of confidential material and the transaction was not of "the nature of a technique for exploiting the Indian market to provide trading ITA Nos.507 to 510/Bang/2009 Page 49 of 56 income". The Court also found that the finding recorded by the Tribunal was by virtue of the transaction Wolf company had parted with its property, being its connection or goodwill in India. The Hon'ble Court found that the company's exports to India amounted to 10 per cent of its total exports by volume and even greater percentage by value and that this volume of business with India represented the assessee-company's largest export market outside the countries where it maintained its own branches. The Court held that if this business was given up as a part of the arrangements arrived at in the agreements then it would be a case of disposal of capital asset not imparting knowledge and therefore receipt was capital receipt. In the present case, as we have already seen, there was no source given up or capital asset disposed. The aforesaid decision would therefore not be of any assistance to the case of the Assessee. The decision in the case of Pfizer Corporation. In Re 271 ITR 101 (AAR) on which reliance was placed by the learned Counsel for the Assessee cannot be accepted because that was a case in which admitted there was an outright sale of know-how and the transfer of the know-how had taken place by transfer of documents containing know-how and technical information outside India (in Denmark).
73. In fact the position in the case of payments for technical know-how in the context of foreign collaboration has been summed up by the CBDT in it's circular No.21 dated 21.7.1969 (73 ITR (ST.) 19 as follows:
"The preamble of the Circular reads thus:
It has been represented to the Board that the in determining the tax liability of foreign and Indian participants in technical collaboration ITA Nos.507 to 510/Bang/2009 Page 50 of 56 agreements, different norms and principles are being applied by different ITOs with the result that there is a great deal of uncertainty in the minds of the foreign parties regarding the incidence of Indian tax on the income derived by them under such agreements. A suggestion, has therefore, been made that in order to remove this uncertainty, the various tax problems arising under technical collaboration agreements, may be reviewed by the Board and detailed instructions issued to the Assessing Officers so that there is uniformity as well as certainty in the matter of tax-treatment.
2. It may be observed at the outset that the tax problems arising in the cases of foreign collaborations are extremely varied and diverse, and the decision depends not merely upon the terms of the particular agreement but also on the nature of the technical know-how actually imparted thereunder. It is, therefore, not possible to lay down clear-cut solutions to cover all conceivable situations. Only general principles and guidelines can be indicated which should be applied in individual cases according to the facts of each case.
3. "Technical know-how" is a term of wide connotation and includes several kinds of technical knowledge assistance and services.
There are several ingredients constituting technical know-how, such as :--
(i) the design of the product to be manufactured;
(ii) the design of the process for manufacture;
(iii) the design and engineering of the plant; and
(iv) the erection and commissioning of the plant etc. etc. There are also different ways of imparting technical know-how which may be :--
(i) through outright sale of designs, know-how etc.;
(ii) by lending the services of foreign technicians;
(iii) by giving technical assistance during the period of agreement;
(iv) through royalty or licensing agreements; or
(v) through foreign capital participation.
A further important aspect is whether or not the nomenclature used in the collaboration agreement really indicates the correct nature and purpose of the payment. In such cases, the real nature and purpose of the payment has to be ascertained and taken into account.
ITA Nos.507 to 510/Bang/2009 Page 51 of 56
4. Broadly speaking, the tax problems arising under technical collaboration agreements are of two kinds, viz., those relating to the admissibility of the expenditure incurred in the assessments of the Indian participant, and those relating to the taxation of the amounts in the hands of the non-resident participant. As regards the former, i.e., the admissibility of the expenditure in the hands of the Indian participant, the question would be whether the expenditure has been incurred for acquiring or brining into existence an asset or advantage of enduring benefit to the assessee's business. If so, the expenditure will have to be regarded as one on capital account. On the other hands, if the expenditure has been incurred for running the business and working it with a view to produce profits, the payment would be allowable as revenue expenditure. The question has necessarily to be examined with reference to the facts of each particular case and no general proposition can be laid down that all payments for technical know-how should be regarded as revenue payments or that they are always capital in nature."
74. In para-11 taxation of the amounts in the hands of the non-resident participant (which is the situation in the present case) has been dealt with as follows:
11. With reference to cases of foreign capital participation, it may be noted that where shares are allotted to a non-resident participant in the form of equity capital of an Indian concern in consideration for transfers abroad of technical know-how or services, or delivery abroad of machinery and plant, and the payment is not taxable under s. 5(2)(b) of the IT Act as income accruing or arising or deemed to accrue or arise in India, it has been decided that no attempt should be made by the Department to bring to tax the profits or gains on such transaction merely on the ground that the situs of the shares is in India. However, if any operations are effected or services are rendered in India, the income will, to that extent, accrue or arise in India and will be chargeable to tax in India. If payments of royalty are made by way of a free issue of equity shares, the value thereof will of course be liable to tax. It is only those shares which are issued at the time of incorporation of the Indian company in lieu of a lump sum payment for the technical know-how delivered abroad, that will be exempt from income-tax as the tax on capital gains. Further if the shares issued in consideration for technical know-how at the time of the incorporation of the Indian company are subsequently sold, the capital gains realised therefrom would be ITA Nos.507 to 510/Bang/2009 Page 52 of 56 subject to tax. Preference shares allotted will be treated in the same way as equity shares in this regard."
(emphasis supplied)
75. In the present case, as we have already seen, operations are effected and services are rendered in India. There is nothing on record to show that there was delivery of technical know-how abroad. On the other hand the circumstances suggest that there has been delivery of technical know-how in India. The learned counsel for the Assessee had placed reliance on the decision of the ITAT Mumbai Bench in the case of DCIT Vs. Lyka Labs Ltd. 310 ITR (AT) 427. That was a case where the question was whether receipts from imparting know-how for 3 years was capital or revenue receipt. The Tribunal held that there was no transfer of a capital asset and that there was only a right to use the information. It was further held that the Assessee was in the business of imparting of information and therefore the receipt was revenue receipt chargeable to tax. In the aforesaid decision the Tribunal held that if by the terms of the transfer of an intangible asset, the transferor is not restrained from use the intangible asset transferred then there is no transfer of the intangible asset. The learned counsel for the Assessee has relied on the above ruling and submitted that in the present case, the Assessee could restrain CIMAB from using the technology in India and therefore there was transfer of intangible by the CIMAB to the Assessee. We do not think that the stand taken by the learned counsel for the Assessee can be accepted. The above observations of the Tribunal were in a different context as to whether ITA Nos.507 to 510/Bang/2009 Page 53 of 56 there was transfer of capital asset which is in the form of information relating to marketing of nitro glycerin formulation for a period of 3 years. The Tribunal in the aforesaid case found that the Assessee gave right to use information but could continue to use the information itself. In fact the Tribunal held that the information remained with the Assessee intact and what was agreed with the transferee was that the information will not be disclosed to other parties for 3 years. We have already seen in the present case that under clause 2.1 of the JVA provides that the JVC will manufacture cancer drugs using the technology developed by CIMAB. The technology brought in by CIMAB would be its capital contribution. The terms on which technology was to be brought in by CIMAB is contained in a TTA. We have already seen the terms of the TTA and have come to the conclusion that there was no transfer of any intellectual property in the technology by CIMAB to the Assessee. Therefore it cannot be said that the Assessee had acquired any right to intellectual property in the know-how.
76. The reliance was placed by the ld. Counsel for the assesse on the decision of the Hon'ble Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. 190 ITR 626 (Cal). The aforesaid judgment is in the context of outright sale of drawings and designs. As we have already seen, in the present case, there is no such outright sale and there is only a right to use the know-how.
77. Reference was also made to the decision of the Bangalore Bench of ITAT in the case of Abhishek Developers v. ITO, 110 TTJ 698 (Bang.). That was again a case where the question was as to whether ITA Nos.507 to 510/Bang/2009 Page 54 of 56 there was an absolute sale of designs & drawings. The Tribunal came to the conclusion that there was an absolute sale of drawings and designs and that there was no rendering of technical services as contemplated u/s. 9(1)(vii) of the Act. We are of the view that the aforesaid decision will not be of any assistance to the case of the assessee before us.
78. The ld. Counsel for the assessee had placed reliance on Article 7.1 of the TTA, which provides that during the term of the agreement the assessee will use the know-how/technology and that the information obtained in the course of such use shall be treated as confidential information and will not be revealed to any person. The ld. Counsel relies on the aforesaid clause in the agreement and the fact that such a right to use is for 20 years contends that there was an absolute transfer of technology. We have already held in the earlier part of order that there was no transfer of know-how, but only a right to use the know-how.
79. Some arguments were advanced by the ld. Counsel for the assessee that technology transfer was not stock-in-trade of CIMAB and therefore it was a capital asset in the hands of CIMAB. We have already observed in the earlier part of the order that CIMAB is not a party to the present proceedings in which the assessee is treated as an assessee in default. Such questions cannot be decided in the absence of CIMAB being a party to the proceedings and in their absence. There is nothing on record to show that the technology in question was not stock-in-trade of CIMAB.
80. Some arguments were advanced by the ld. Counsel for the assessee that technology was transferred within the meaning of the term ITA Nos.507 to 510/Bang/2009 Page 55 of 56 'transfer' as defined in section 2(47) of the Act. We have not dealt with this submissions because we have already analysed the terms of TTA and come to the conclusion that in pith and substance, the TTA was only conferring right to use technology on the assessee. We have also held in the earlier part of this order that the reference made by the ld. Counsel for the assessee on the various texts as contained in various commentaries on intellectual property on the aspect of intellectual property comprising of a bundle of rights and different persons capable of owning different parts of the bundle of rights cannot be sustained on the facts and circumstances of the assessee's case.
81. It was argued that the situs of technical know-how was Cuba where it was developed. It was argued that once the situs of a know-how is out of India, any transfer of such technical know-how to a person in India should be deemed to have taken place outside India, because the situs of the know-how is outside India. We do not think that situs alone will be a decisive factor. The place at which the transfer of the know-how takes place can be different from the place at which the know-how was developed or acquired by the transferor. If the know-how is transferred in India, then that would give rise to accrual of income in India which can be brought to tax in India. We do not think any discussion on this aspect will be material because, we have already held that there was no transfer of technology within the meaning of the Act.
82. Arguments were advanced on the question whether know-how can be subject matter of transfer or know-how can only be imparted and not ITA Nos.507 to 510/Bang/2009 Page 56 of 56 transferred. We do not think it necessary to deal with those submissions because of our conclusions that there was only a right to use the know- how.
83. For the reasons given above, we uphold the orders of the CIT(A) and dismiss the appeals of the assessee.
Pronounced in the open court on this 19th day of April, 2013.
Sd/- Sd/-
( JASON P.BOAZ ) ( N.V. VASUDEVAN )
Accountant Member Judicial Member
Bangalore,
Dated, the 19th April, 2013.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.