Income Tax Appellate Tribunal - Delhi
Dcm Ltd. vs Income-Tax Officer on 11 October, 1988
Equivalent citations: 1989 29 ITD 123 Delhi
1. These two appeals, filed by the assessee, arise out of the consolidated order dated 8-7-1985, of the learned Commissioner of Income-tax (Appeals)-VIII, new Delhi.
2. The assessee is M/s. Delhi Cloth & General Mills Co. Ltd., Bara Hindu Rao, Delhi-6 (hereinafter referred to as DCM). The point raised is interesting as well as important and is whether the payments in question could be said to amount to "royalty". The facts necessary for understanding the point at issue and which are not under dispute are as follows. Tate & Lyle Process Technology Division of M/s. Tate & Lyle Industries Ltd., London (hereinafter referred to as TL) has extensive knowledge and experience and has been a pioneer in Sugar Technology for many years. It manufactures special dosing and control equipment and possesses valuable and particular know-how in relation to the installation and operation of the special equipment, operation of the processes and use of essential speciality chemical products, which help to eliminate the use of lime-stone and hard coke, save on energy consumption, reduce pollution effects and also reduce the substantial sugar losses in carbonatation mud in the manufacture of plantation white sugar (known as "process technology"). The patents, the "process technology" and special equipment used together are known as "TALODURA" and "TALOFIL-TRATE" processes (referred to as "Talo Processes").
The DCM wanted to adopt the "Talo Processes" to treat juice evaporator syrup and filtrate for the manufacture of the product at its existing sugar factories in India (Deprala). Therefore, DOM entered on 12-10-1983 into a Technical Collaboration Agreement with TL for the transfer of comprehensive technical information and know-how and the supply of equipment by TL to DCM. As per this Agreement, the information relating to "Talo Processes" was to be transferred to DCM by TL outside India. In consideration of the supply of the documents concerning the processes, DCM had to pay a total amount of £ 1,55,000 in four instalments. The first instalment of £ 38,750 was to be made as a down-payment on the effective date of this Agreement and the balance amount of £ 1,16,250 was to be paid in instalments of £ 77,500, £ 23,250 and £ 15,500 in accordance with para 6.1 of the aforesaid Agreement. The assessee, therefore, approached the Inspecting Asstt. Commissioner (Asst.) for "No Objection" certificates for these remittances. The IAC (Asst.) issued one certificate on 27-3-1984 for £ 38,750 and another certificate on 17-5-1984 for £ 1,16,250 in both of which it was made a condition that tax at the rate of 20 per cent was to be remitted by the DCM in its capacity as a representative assessee. Although the orders of the IAC (Asst.) did not specifically say so, such orders were passed by him ostensibly under Section 195(2) read with Section 115A(1)(n) of the Income-tax Act, 1961 as applicable at that time, treating the amounts in question as "royalty".
The expression "royalty" in Explanation (c) to Section 115A(1) has been assigned the same meaning as in Explanation 2 to Section 9(1)(vi), namely, "For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for--
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design formula or process or trade mark or similar property ;
(iii) 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;
(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 (v).
In the convention entered into between the Government of India f and the Government of UK for the avoidance of double taxation [vide Notification No. GSR 612(E) dated 23-11-1981 of the Ministry of Finance (Department of Revenue)], the term "royalties" in para 3 of Article XIII has been defined to mean payments of any kind including rentals received as a consideration for the use of, or the right to use:
(a) any patent, trademark, design or model, plan, secret formula or process ;
(b) industrial, commercial or scientific equipment, or information concerning industrial, commercial or scientific experience ;
(c) any copyright of literary, artistic or scientific work, cinematographic films, and films or tapes for radio or television, broadcasting, but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources.
The two definitions are not identical as under the Double Taxation Avoidance Agreement, the definition is a truncated one. The IAC (Asst.) however, seems to have gone by the definition of "royalty" under the Income-tax Act, 1961.
3. In appeal, although the learned CIT (A) accepted the position that the definition of "royalty" under the Double Taxation Avoidance Agreement would override the definition of "royalty" under Section 9(1)(w) of the Income-tax Act, 1961, he took the view that the term "royalty" would include both lump sum as well as periodical payments on account of the use of the expression "payments of any kind". He was of the view that in the present case, the payment had been made for the import of technical know-how for manufacture of sugar. He observed that "technical know-how" is a term of wide connotation and there are ingredients constituting technical know-how, design of the product, design of the process for manufacture, outright sale of designs or know-how, rendering of technical assistance, etc. He took the view that the term "technical know-how" was wide enough to include outright sale of designs or know-how as well as provision of technical assistance. According to him, in the present case, technical know-how was provided by the foreign enterprise including lending of services of foreign technicians, and therefore, the payments in question were of the nature of "royalty". He did not accept the submission made on behalf of the assessee that the payments in question constituted industrial or commercial profits in the hands of the foreign enterprise as per Article VII of. the Double Taxation Avoidance Agreement which were not chargeable to tax in India if the foreign party had no permanent establishment in India.
4. Before us, Shri O.P. Vaish, the learned counsel for the assessee reiterated the submissions made on behalf of the assessee before the Income-tax authorities. He submitted that what the DCM had purchased was equipment and know-how in the form of a packet of documentation akin to a video tape or computer software system which the DCM could not duplicate. According to Shri Vaish, the case of the DCM came Under Section 9(1)(vi)(i) which did not form part of the definition of "royalties" under Article XIII para 3 of the Double Taxation Avoidance Agreement. In this connection, reference was made by him to a chart wherein the differences between the definitions of "royalty" under the Income-tax Act and under the Double Taxation Avoidance Agreement were given. He accordingly argued that if the case of the assessee was not governed by Article XIII of the Double Taxation Avoidance Agreement it could only be governed by Article VII according to which, the profits of an enterprise of a contracting State could be taxable only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. He also referred to Article V in this connection which defines the term "permanent establishment" as a fixed place of business in which the business of the enterprise is wholly or partly carried on. Pointed reference was also made by him in this connection to para 2(j) of Article V wherein "permanent establishment" is provided to include a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity, continues for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charge payable for the project or supervisory activity exceed 10 per cent of the sale price of the machinery and equipment. He also in this connection referred to a certificate dated 2-3-1984 of TL to the effect that they had no permanent establishment in India in terms of Article V and that the amount payable They the DCM in terms of the Agreement entered into on 12-10-1983 for the disclosure of the "know-how" constituted business profits in terms of Article VII of the Convention. Reference was also made by him to the decision of the Hon'ble Karnataka High Court in the case of Citizen Watch Co. Ltd. v. IAC  148 IT.R 774 wherein the collaboration agreement between the Government company and Japanese company was considered and it was held that documentation fee and technical assistance fee paid to Japanese company did not constitute "royalty" in terms of Article X(b) of the double taxation avoidance agreement. He also referred to the Board's Circular dated 9-7-1969 wherein the terms "technical know-how" and "royalty" had been elaborated. A passing reference was also made by him to an order of Madras Bench 'D' in the case of IAC v. Demagmeer Rohrtechnic, W. Germany [IT Appeal No. 1233 Mad. of 1981, dated 3-1-1983] for the A.Y. 1977-78 by agent M/s. Bharat Heavy Electricals Ltd., Tiruchirapalli wherein the nature of payment made by BHBL to the German company for supply of drawings and documentation was considered. However, the facts in that case were admittedly different from the facts in the present case. On the basis of the above submissions, Shri Vaish argued that the remittances in question were not liable to 20 per cent tax and that they were not treatable as "royalties".
5. On the other hand, Smt. Manjari Kakkar, the learned departmental representative strongly supported the order of the learned CIT(A). Reference was made by her to paras 3.5 to 3.7 of the Technical Collaboration Agreement, according to which TL was obliged, on request by DCM to despatch one or more of its engineers/technologists and specialists to visit the factory site, consult with management and... train the factory personnel...and commission the TALO processes and carry out the test runs. Next she laid emphasis on the use of expression 'payment of any kind' in Article XIII, para 3 of the double tax avoidance agreement. She submitted that part of the payment was for services. According to her, the remittances in question amounted to 'royalties' even as so denned in Article XIII, para 3 of the double taxation avoidance agreement. She, therefore, argued that the order of the learned CIT(A) did not call for any interference.
6. We have considered the rival submission's of both the sides as also the decisions referred to above. The double taxation avoidance agreements are referable to Sections 90 and 91 of the Income-tax Act, 1961, Where a specific provision is made in the double taxation avoidance agreement, that provision prevails over the general provisions contained in the Income-tax Act. The laws in force in either country continue to govern the assessment and taxation of the income in the respective countries except where provisions to the contrary have been made in the agreement. This position is not under dispute before us and was also clarified vide Circular No. 333 dated 2-4-1982 of the Foreign Tax Division.
7. Therefore, we have to examine the definition of 'royalty' under the double tax avoidance agreement rather than under the Income-tax Act, 1961. It would, therefore, not be necessary to look at the dictionary meaning of the said term or even to refer to the Circular dated 9-8-1969 of the Board dealing with the nature and meaning of this term. A perusal of the Technical Collaboration Agreement shows that the amount of £ 1,55,000 was to be paid by DCM to TL once for all as consideration for the grant of licence and the disclosure of the know-how. Para 2 of the said agreement provided that TL was to grant DCM the right and full but non-transferable licence to practise the TALO Processes at its existing factories. The DCM could sub-licence its rights to another Indian party with the consent of TL and with the approval of the Government of India. Para 3 of the said agreement provides for the disclosure of the know-how, of which the details appear from paras 3.1 to 3.9. We find that the definition of 'royalty' under Explanation 2 to Section 9(1)(m) of the Income-tax Act, 1961 is not the same as the definition of the term under Article XIII(3) of the double taxation avoidance agreement. As rightly submitted on behalf of the assessee, the definition under the double taxation avoidance agreement is a truncated one, i.e., it is narrower than the definition under the Income-tax Act. A comparative look at the two definitions shows that the following part of the definition which occurs in Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961 does not figure under Article XIII(3) of the double taxation avoidance agreement:
(i) The transfer of all or any rights (including the granting of the licence) in respect of a patent, invention, model design, secret formula or process or trade mark or similar property ; and
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property.
The know-how is an intellectual property and the excluded clauses referred to above pertained to the know-how of secret formula or process and the imparting of any information concerning the working thereof. The assessee, in our view, is right in submitting that the things for the transfer of which DCM agreed to pay to TL £ 1,55,000 as such squarely fell within these two exclusionary clauses which do not form part of the definition of the term 'royalty' under Article XIII(3) of the double taxation avoidance agreement. The Income-tax authorities in our view, were not right in being influenced by the term 'payments of any kind' preceding the definition of this term under the double taxation avoidance agreement. Article VII of the double taxation avoidance agreement provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but to the extent attributable to that permanent establishment. Article V of the said agreement defines the term 'permanent establishment' as meaning a fixed place of business in which the business of the enterprise is wholly or partly carried on. Thereafter, certain categories - (a) to (j) are enumerated which would be included in the term 'permanent establishment'. Neither under the main definition nor under the inclusive part thereof it could be said that TL has a permanent establishment in India. In this connection it is also relevant to notice that TL had clearly stated in its certificate dated 2-3-1984 that the amount payable by DCM in terms of the agreement entered into on 12-10-1983 for the disclosure of the know-how constituted business profits in terms of Article VII of the Convention and that TL had no permanent establishment in India in terms of Article V of the Convention. This certificate was obtained by the assessee prior to the orders of the Inspecting Asstt. Commissioner (Asst.). This certificate, therefore, supports the case of the assessee. Para 3.5 of the Collaboration Agreement dealing with the dispatch by TL to DCM of one or more of its engineers/technologists and specialists to visit the factory site, train the factory personnel and to commission the TALO processes, etc., would not create a permanent establishment as so defined under Article V of the Convention. We are, therefore, of the view that the consideration for the transfer of drawings, designs, etc., outside India by TL to DCM did not constitute 'royalty' as defined in Article XIII of the Convention and that the said consideration actually constituted business profits for the said foreign concern which too could not be taxed through, the assessee as per Article VII of the Convention as that foreign party has no permanent establishment in India. The decision of the Hon'ble Karnataka High Court in the case of Citizen Watch Co. Ltd. (supra) was similar. There the Hon'ble High Court was considering the Collaboration Agreement between the Government Company and the Japanese Company and it was held that the documentation fee and technical assistance fee paid to Japanese company did not constitute 'royalty' as defined under Article X(e) of the relevant double taxation avoidance agreement between Japan and India. We are, therefore, of the view that the assessee is entitled to succeed in these appeals.
8. The appeals are accordingly allowed.