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Income Tax Appellate Tribunal - Jaipur



Modern Threads (I) Ltd. vs Deputy Commissioner Of ... on 12 January, 1999

Equivalent citations: 1999 69 ITD 115 JP

1. This is an appeal filed by the assessee directed against the order of the CIT(A), Jaipur dated 11-3-97. The appellant has taken the following grounds in this appeal :-

1. That on the facts and in the totality of the circumstances and material available the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts in holding that the lumpsum Technical know-how fees of USD 250 lacs and basic Process Engg. Documentation fees of USD 35 lacs were in the nature of 'royalty' under Article 13(3) of the Double Taxation Avoidance Agreement (DTAA) between India and Italy without appreciating that the consideration of USD 250 lacs and USD 35 lacs are for acquiring technical know-how and Basic Process Engg. Documentation and are not the consideration for the use of or right to use such know-how and Basic Process Engg. Documentation.

2. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts not holding that USD 250 lacs of which USD 75 lacs being the first instalment is a part and USD 35 lacs of which USD 10.5 lacs being the first instalment is a part, being lumpsum technical know-how and basic process Engg. Documentation fees as non-taxable 'Business Profits' under article 7(1) of the DTAA between India and Italy in view of no permanent establishment of M/s. Technimont, S.P.A. of Italy in India.

3. That the learned Commissioner of Income-tax (Appeals) has erred in law as well as on facts in holding that the assessee appellant has not made any out-right purchase of the exclusive fights over design, secret formula, or process and therefore, there is no acquisition of technical know-how whereas the assessee appellant did acquire rights over design, secret, formula or process know-how and technical know-how for that agreed payment is to be made.

2. The brief facts of the case are stated in assessment order as well as in CIT(A)'s order. For the sake of convenience, the facts of the case are briefly stated here also as under.

3. M/s. Modern Threads (India) Ltd. (hereinafter referred to as MTIL) with its principal office at A-4, Vijay Path, Tilak Nagar, Jaipur (Rajasthan) entered into a contract dated 15-12-1995 read with Addendum, dated 15-1-1996 and 3-2-1996 with M/s. Technimont S.P.A. having its principal office at Milan, Viale Monte Grappa 3, Italy for grant of rights and sub-license to use the'process and technical know-how'as per article 2 of the Agreement between them. The Agreement also provided for supply of Basic Process Engg. Documentation as per article 3.2. of the Agreement and transfer of technical know-how as per article 1.11 of the said Agreement. The agreement was approved by the Government of India Ministry of Industries, Department of Industrial Policy and Promotion :

Secretariat for Industrial Approvals , New Delhi vide the ir letter No. FC II/279(96)/1310/(95)-Amend dated 15-7-1996. The agreement inter alia provided for payment of lumpsum technical know-how fee of USD 250 lacs payable in 4 (four) instalments, net of taxes, and royalty payable USD 5.00 per metric tonne of products, subject to maximum of USD 50 lacs and USD 35 lacs, net of taxes for the supply of Basic Process Engg. Documentation. The lumpsum payment of USD 35 lacs, net of taxes was payable in four instalments. The first instalment of 30% of USD 250 lacs, USD 75 lacs and 30% of USD 35 lacs i.e. 10.5 lacs USD was payable by MTIL to M/s. Technimont as per the contract agreement and accordingly the appellant filed an application under section 195(2) for claiming exemption from taxes of these remittances. The Assessing Officer in his order under section 195(2) dated 20-12-1996 held that the consideration of USD 250 lacs and USD 35 lacs to be paid by the appellant to the Italian company was in the nature of Royalty and hence liable to tax C 20% as determined under the provisions of Direct Tax Avoidance Agreement (DTAA) between India and Italy. The company preferred an appeal before the learned CIT(A) against this order of the Assessing Officer made under section 195(2).

4. The learned CIT(A) decided the appeal on 11-3-1997 upholding the order of the Assessing Officer under section 195(2). The CIT(A) held that the impugned payments were of royalty taxable in India under the provisions of DTAA read with various terms of the contract agreement. The detailed submissions were submitted before the CIT(A). Reliance was placed on a decision of the ITAT Special Bench, Calcutta in the case of Graphite Viscarb (India) Ltd. v. ITO [1993] 199 ITR 119 (AT).

Reliance was also placed on a decision of the CIT(A)-XXII, Bombay in the case of Gujrat Apar Polymers Ltd. dated 18-11-1992. After considering the submissions and other materials on record, the CIT(A) was not satisfied and after giving reasons in detail in her order, the CIT(A) upheld the order of the Assessing Officer. Now the assessee is in appeal here before us.

5. The learned counsels S/Shri Dinesh Vyas alongwith Shri P. D. Desai appeared on behalf of the assessee. Shri Dinesh Vyas, the learned counsel for the assessee reiterated the submissions made on behalf of the assessee before the CIT(A). He further submitted that the assessee entered into an Agreement with the Italian company which provided for supply of Basic Process Engg. Documentation as per article 3.2 of the Agreement and Transfer of technical know-how as per article 1.11 of the same agreement. The payment was to be made by the company as net of taxes. He further submitted that if General Law is seen then it may be considered as Royalty but as per section 90 which is about the avoidance of double taxation, the sum paid by the assessee-company to the Italian company does not fall under payment as income earned by the Italian company taxable in India. The payments were made as per certificate granted by the Government of India as per the Agreement between the two countries regarding avoidance of double taxation. The learned counsel of the assessee also placed a copy of Vienna Convention for guidance purpose wherein it is clearly mentioned that agreement entered between the two countries should be followed honestly/peacefully by each of the Government.

6. It was further submitted that Italian company has no permanent establishment in the country and when a contracting company does not have any permanent establishment in the country where the payments were effected, no tax is payable on those payments made by the party of that country.

Article 13.3 of the Agreement is very important which is overriding clause over section 9(1)(vi). It was further submitted by learned counsel that the assessee company ultimately became the owner of the formula as the term of secrecy was expired after 15 years of the Agreement date. It was strongly argued that the case of the assessee is merely based on facts of the case which proved that payment of the agreement amount was not taxable in India as per the Avoidance of Double Taxation Agreement. He further placed reliance in case of DCM Ltd. v. ITO [1989] 29 ITD 123 (Delhi) wherein similar case was decided by the Tribunal in favour of assessee.

7. On the other hand the learned D.R. strongly supported the order of the CIT(A). He further submitted that the assessee was not absolute owner of the rights and provisions of section 9 as per Explanation-2 applicable in the case of the assessee. He further placed reliance on Alembic Chemical Works Co. Ltd v. CIT [1989] 177 ITR 377 (SC) and N. V. Philips v. CIT (No. 1) [1988] 172 ITR 521 (Cal.). It was further submitted by the learned D.R. that contract made by the parties was conditional contract as the assessee became the owner of the products and not of the formula. The learned D.R. also said that Vienna Convention is not helpful to the assessee as these type of treaties were of the political treaties in nature. The Indian Constitution is not guided by any authority of the World as the Indian Constitution is an independent constitution of the country. Therefore, the guidelines prepared in Vienna Convention is not helpful to the assessee at all. It was further argued that legal effect has to be seen and on this aspect reliance was placed on CIT v. Gillanders Arbuthnots & Co. [1973] 87 ITR 407 (SC), CIT v. B. M. Kharwar [1969] 72 ITR 603 (SC) and Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790 (SC).

8. In reply of the submissions made by the learned D.R., the learned counsel submitted that no doubt, as per provisions of section 9(1)(vi) the amount paid can be treated as Royalty but the Agreement entered into by the assessee and the Italian company was in accordance with the DTAA between the two countries. Therefore, section 90 is overriding section 9(1)(vi) of the Income-tax Act.

He further submitted that the cases relied upon by the learned D.R. are distinguishable as the facts of the case are different. In case of Alembic Chemical Works Co. Ltd (supra) wherein the Hon'ble Supreme Court has held that the amount paid to the company of any other country was payment of revenue in nature and was not capital in nature. Therefore, the facts of this case are distinguishable with the facts of the assessee's case. In case of N. V. Philips (supra) wherein the payments were held as the character of royalty. That agreement was as per general clauses of the Income-tax Act and not as per DTAA as per article 13.3 of the Agreement. Therefore, the ratio of this case also does not help to the submission of the learned D.R. Likewise, other cases relied upon by the learned D.R. are distinguishable on facts. Therefore, they are also not helpful to the revenue.

9. We have heard the rival submissions carefully and considered the material on record also. According to the Assessing Officer and CIT(A) the payment made to the non-resident company was in the nature of royalty within the meaning of Explanation-2 to section 9(1)(vi) of the Act and accordingly the tax was properly levied. It is also the contention of the revenue that if there be any inconsistency between the Agreement for DTAA any Explanation-2 to section 9(1)(vi) in that event the Act will prevail over the Agreement. First we would like to see provisions of section 9(1)(vi) and Explanation-2.

Explanation-2 says -

"Explanation-2. For the purposes of this clause, 'royalty' means consideration (including any lumpsum consideration but excluding and 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;

(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)."

Now we will see the section 90 which says about avoidance of double taxation. Sub-clause (2) of section 90 says where the Central Government has entered into an Agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

10. We would like to define first that which provisions are applicable here in the present case i.e. whether provisions of section 9(1)(vi) or provisions to section 90 of the Income-tax Act.

11. The definition of 'Royalty' appeared in article 3 of the agreement for avoidance of double taxation made between India and Italy is no doubt different from the definition appearing in Explanation 2 to section 9(1)(vi) of the Act. In determining the liability of a non-resident company, if there is any agreement for avoidance of double taxation entered under section 90 of the Income-tax Act, 1961, the said Agreement must prevail over the provisions of Income-tax Act, otherwise, there was no point in entering into any Agreement for avoidance of double taxation. Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the Agreement of avoidance of double taxation such arrangement or agreement will necessarily prevail over the provisions of the Statute.

12. In this connection we may usefully refer to the Notification enforcing the Convention between the Government of India and the Government of Italy which are placed at pages 115 to 134 of the Paper Book. This Notification is dated 25th April, 1996 bearing No. 10075, which reads as follows - "Whereas the annexed Convention between the Government of the Republic of India and the Government of the Republic of Italy for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income has entered into force on 23rd November, 1995 after the exchange of Instruments of ratification by the Contracting States in accordance with Paragraph 1 of Article 30 of the said Convention;

Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.' By going through this clarification this is clear that intention of the Government is to avoid the double taxation. All provisions of the said Convention shall be given effect to notwithstanding the provisions contained in relevant Act or Acts. Therefore, provisions of section 90 shall prevail upon the provisions of section 9(1)(vi) of the Income-tax Act. In our view, where an express provision to the contrary is made in this Agreement, the transaction will be governed by such agreement. Explanation 2 to section 9(1)(vi) cannot have any application in as much as the definition of Royalty has been specifically provided in the agreement. Thus, an express provision to contrary has been made in the agreement. Explanation 2 to section 9(1)(vi) makes it quite clear that royalty as defined in Explanation 2 is only for the purposes of clause (vi).

The said meaning assigned to royalty cannot be made applicable in an agreement which is made under section 90 of the Act. In this regard we conclude that in case of inconsistency between the terms of the agreement and the taxation statute, the agreement alone would prevail. We have also seen the Circular No. 333 dated 2-4-1982, a copy of which is placed on record at page 113 of the Paper Book wherein the Board has laid down as follows "2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act. In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the country have been made in the agreement.

3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act. Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income."

In our view, the circular reflects the correct legal position inasmuch as the Convention or Agreement is arrived at by the two contracting Governments in deviation from the General Principles of Taxation applicable to the Contracting States. Otherwise, the double taxation avoidance agreement will have no meaning at all.

13. In case of DCM Ltd. (supra) where the similar issue was involved. In that case the question was involved that whether the payments to a foreign company could be said to amount to royalty. In fact, in that case the assessee in M/s. DCM Ltd. has entered into an Agreement with M/s. Tate & Lyle Industries Ltd., London, who has extensive knowledge and experience and has been a pioneer in Sugar Technology for many years. M/s. Tate & Lyle Industries Ltd. 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 limestone and hard coke. The assessee M/s. DCM Ltd. entered into an agreement on 12-10-1983 for the transfer of comprehensive technical information and know-how and the supply of equipment by M/s. Tate & Lyle (TL) to M/s. DCM Ltd.

In consideration of the supply of documents concerning the processes, the DCM had to pay a total amount of Pounds 1,55,000 in four instalments. The assessee approached the Inspecting Assistant Commissioner for No Objection Certificate for these remittances. The IAC issued the Certificate with a condition that tax @ 20% was to be remitted by the assessee in its capacity as a representative assessee, treating the amounts in question as royalty. On appeal, the 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)(vi), but held that the term 'royalty' would include both lumpsum as well as periodical payments on account of the use of the expression "payments of any kind" in article XIII (3) of the Double Taxation Avoidance Agreement between India and U.K. He, therefore, held that the 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'. On second appeal, the Tribunal held that the payment did not constitute 'royalty' as defined in article XIII of the Convention and it was further held that the aforesaid consideration constituted business profits for the foreign concern which too could not be assessed through the assessee as per article VII of the Convention as TL had no permanent establishment in India. In that case the case of Citizen Watch Co. Ltd v. IAC [1984] 148 ITR 774 (Kar.) was followed wherein the similar issue was decided by the Hon'ble Karnataka High Court. The facts in the present case are similar to the case of DCM Ltd. (supra). In the present case also the assessee entered into an Agreement with the Italian company and payments were made as per the agreement of Avoidance of Double Taxation. Therefore, we are not in hesitation to hold that the payments made by the assessee cannot be held as royalty as per section 9(1)(vi) as the provisions of section 90 shall prevail upon.

In the present case the assessee paid amount to Italian company who was not having a permanent establishment in India. A certificate to this effect is placed at page 112 of the Paper Book wherein the Italian company has confirmed that it has no permanent establishment in India. It was further mentioned in the said certificate that the provisions set forth under the Treaty for the Avoidance of Double Taxation in force between India and Italy shall refer to the case of Italian Companies without permanent establishment in India. We have also seen the provisions of Article VII wherein it is mentioned 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. In this case we have already mentioned that there is no permanent establishment of the recipient company. We have also seen the agreement where it is clearly mentioned that technical know-how fees payable in four instalments net of taxes. It clearly proves that the intention of the Agreement was that there should not be any tax levied in India on the Italian company. We have also gone through Vienna Convention wherein it is mentioned that disputes concerning treaties, like other international disputes should be settled by peaceful means and in conformity with the principles of justice and international law. 

14. In our view the principles of Vienna Convention is guidelines for the countries who are party to this Convention. It is also emphatic to explain that when an agreement is entered between two countries that should be fulfilled by following its terms and conditions. In our considered view Indian and Italian Governments entered into an agreement for avoiding the double taxation in both the countries. Therefore, provisions of section 90 are also overriding on provisions to section 9(1)(vi).

15. We have also gone through the clauses of Agreement between the assessee and the Italian company. Article VIII is about Secrecy. In clause 8.4 of this Agreement it is clearly mentioned that the Sub-licensee's secrecy obligations under this Article 8 shall terminate 15 (fifteen) years after the effective date. It clearly shows that after 15 years the assessee is not bound to keep the documents as secret. After the expiry of 15 years the assessee is free to use the documents as per its will. It can be inferred from this clause that assessee became the owner of the rights which he got through agreement. This contention of the revenue is not tenable that the assessee is not absolute owner of the rights.

16. We have also considered the other case laws relied upon by the learned D.R. and after pursuing the ratios of those decisions, we are of the view that those decisions are not helping to the department. This view of ours finds further support from that no contradictory decision is available at present on this issue as before us. Therefore, we are of the opinion that assessee is entitled to succeed as the payment made by the assessee did not constitute Royalty as defined in Article 13 of the relevant Double Taxation Agreement between India and Italy.

17. In the result, the appeal of the assessee is allowed. Per Pradeep Parikh, AM :
18. I have thoroughly perused the proposed order passed by my learned Brother. After careful consideration of the said order, I find myself not to be in agreement with the conclusion reached by my learned Brother. Hence, I am constrained to make a separate order on the issue raised in appeal.

The grounds of appeal and the facts of the case have been mentioned at paras 1 to 4 of the proposed order and hence I need not repeat them for the sake of brevity.

19. The point in dispute is that whether the consideration of US $ 250 lakhs payable by the assessee to use the process and technical know-how for the implementation of the plant and use and sell the product so manufactured, as well as the consideration of US $ 35 lakhs for the supply of Basic Process Engineering, are in the nature of royalty or not.

20. There is no difference of opinion between the revenue and the assessee that in view of section 90, the definition of royalty as given in the Double Taxation Avoidance Agreement (DTAA) between India and Italy shall prevail over the definition given in the Act. As a matter of fact, the CIT(A) has decided the issue on these lines only and my learned Brother has also held that the definition as per DTAA shall prevail. Hence we have to determine the issue in the light of the definition of "royalty" given in DTAA. The learned counsel, no doubt, while interpreting the term royalty as per the DTAA, did take the help of the definition provided in the Act. I repeat, the definition of royalty given in the Act was merely referred to as an aid to interpret the said term given in the DTAA. In short there is no dispute that the definition as given in DTAA shall prevail.

21. Article 13.3 of the DTAA between India and Italy defines the term royalty as follows :

"The term "Royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literature, artistic or scientific work, including cinematography film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipments, or for the information concerning industrial commercial or scientific experience."

As mentioned earlier, in order to interpret the above clause in its right perspective, the learned counsel referred to the definition given in the Act which is found in Explanation 2 to section 9(1)(vi).

Mainly clauses (i) to (iii) of the said Explanation we referred to, which are as follows :

"Explanation 2 - For the purposes of this clause, 'royalty' means consideration (including any lumpsum 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 right (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, 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;"

22. Referring to the above 3 clauses, Shri Vyas urged the Bench to assume the 3 clauses as three separate boxes. It was submitted that as per the treaty, if the assessee's case was in the third box, it would certainly be called Royalty. However, it was contended that the assessee's case was not in the third box, as according to him, there was something more than mere right to use, which the assessee received. Similarly, the assessee's case was also stated not to be in the first box as there was no outright transfer of the formula or the process. Hence after ruling out the extreme position, it was submitted that the assessee's case was either somewhere in between box one and box two, or it was blend of the two boxes what the assessee received.

23. In other words, what the learned counsel contended was that it was not a more right to use the process which the assessee acquired, but there was something more. According to him the assessee required a bundle of rights like licence, co-ownership, deferred co-ownership, and so on. To drive home this point, reference was made to several clauses of the DTAA entered into between India and Italy. Special references were made to articles 7.1, 7.6, 13.1, 13.2 and 13.3.

24. Reference was then made to the relevant portions of the Agreement between the assessee and the Italian Company whereby it was tried to establish that the assessee did not merely acquire the right to use the process in India but also sub-licence under the Agreement. For this, reference was first made to the addendum to the contract on pages 41 and 46 of the paper book. Articles 1.11, 2.1, 2.3, 5, 8, 11 and 12 were specially referred to by the learned counsel.

25. The contentions of the learned D.R. are not repeated for the sake of brevity as they have been already set out by my learned brother in para 7 of his order. The contentions of the learned counsel set out in the preceding paras are only those which, though relevant, have not been set out and considered by my learned Brother.

26. At the outset, I would first like to deal with the decision of the Delhi Bench of the Tribunal in the case of DCM Ltd. (supra), on which much reliance has been placed. In that case, DCM entered into a Technical Collaboration Agreement with a UK based company (TL) for the transfer of Comprehensive Information and Know-how and the supply of equipment by TL to DCM. In consideration of the supply of documents concerning processes, DCM had to pay a total amount of Pounds 1.55 lakhs in 4 instalments. The department treated this amount as Royalty. The contention of the DCM before the Tribunal was that what the DCM had purchased was equipment and know-how in the form of a packet of documentation akin to video tape or Computer Software System. Accordingly it was contended that the case of DCM Ltd. (supra) came under clause (1) of the Explanation 2 to section 9(1)(vi) which did not form part of the definition of 'Royalties' under the DTAA between India and UK. Hence, it was submitted that if the case is not governed by Article relating to royalty, it would automatically be governed by the Article relating to profits, which could not be taxed in India as TL did not have a permanent establishment as a fixed place of business in India. On these facts the Tribunal accepted the claim of DCM.

27. The facts in the present case, I am afraid, are certainly distinguishable at least on two counts.

Firstly, in DCM Ltd.'s case (supra) there was transfer. In the present case, the Italian Company, as a sub-licensor has granted the rights and sub-licence to use and practice the process in India.

Secondly, in DCM Ltd.'s case (supra), DCM had purchased equipment and know-how. In the instant case there is neither the purchase of equipment, nor the know-how but merely right to use the process is acquired. Moreover, it is also not the case of the assessee, as made out in the case of DCM that the case would be governed by the Article relating to profits. Thus in my view, the decision in DCM Ltd.'s case (supra) cannot be applied in the present case.

28. The main thrust of the learned counsel's argument was that it is not merely the right to use the process that the assessee has acquired, but there is something more than that. In fact, according to him, a bundle of rights has been acquired by the assessee. Hence now we shall unfold the bundle and see what it contains as was shown to us by the learned counsel ' The bundle referred to is nothing but the agreement between the assessee (sub-licensee) and the Italian Company (sub-licensor).

29. Firstly, Article 1.11 was referred to in which it is mentioned that both the licensor and the sub-licensor are free to disclose the know-how to the assessee. In this regard, for the sake of clarification it may be mentioned that INCA International, Italy is the owner of the technical information and know-how which is the subject-matter of the Agreement, and is referred to as licensor. Tecnimont, Italy is the sub-licensor who has been authorised to grant such sub-licence to the assessee company which is referred to as the sub-licensee. In the present appeal the co-contract is between the sub-licensor and sub-licensee. Thus, now coming back to clause 1.11, the learned counsel submitted that the legal character of the right acquired by the assessee would remain the same irrespective of the fact whether the same is provided by the licensor or the sub-licensor. We agree with the learned counsel on this point, but it does not add anything beyond the right to use the process.

30. Next, Article 2 was referred to. The said Article is titled as 'Grant of rights and sub-licence'. It was contended that the title itself clinches the issue as the sub-licensor is granting not only the right but also sub-licence to use the process, technical know-how, product and Basic Process Engineering.

It should, therefore, be our endeavour to see what right the assessee got and in what respect it got sub-licence.

31. T. P. Mukerjee's Law Lexicon, Vol. 2 (1982 edition) describes the term "licence' as follows :

'In the most natural sense, "licence' is an authority justifying the doing of what otherwise would be wrongful. In the commonly accepted sense, the term means authority, or permission to do a thing which the licensor would otherwise have the right to prevent. A licence confers a right which does not exist otherwise. It is in the nature of a grant or permission to exercise certain privilege, or to carry on a particular business or to pursue a certain occupation. In the popular as also in the legal sense it is a permission to do something which, without the licence, would not be allowable."

32. P. Ramanatha Iyer's Law Lexicon (1997 edition) describes the term "licence" as follows :

"An authority to do something which would otherwise be inoperative, wrongful or illegal; a formal permission from a constituted authority to do something. In the popular as also in the legal sense a licence is a permission to do something which, without the licence would not be allowable. In the secondary sense it denotes a certificate or document which embodies the permission in question."

The above paras, no doubt, explain the meaning of the term licence, whereas the case before us is that of sub-licence. Nonetheless, for all practical purpose, the same meaning would be applicable to the case of sub-licences also as they create rights with the same character.

33. In the present case, the assessee acquired only a right to use the know-how by virtue of a sub-licence granted under a contract between the assessee and the Italian Company. I fail to understand as to what else the assessee acquired besides the right to use. It has not acquired the ownership of the know-how, as the preamble of the contract makes it clear that the same is owned by INCA International S.P.A., Italy. Further, the preamble also makes it clear that the sub-licensor has the right to sub-licence the technical know-how. No similar right has been acquired by the assessee under the contract. The other relevant clauses of the contract also do not mince words and are in conformity with the main object of the contract that the assessee has only the right to use the know-how and nothing beyond it.

34. Under Article 8, the assessee, as the sub-licensee, is under obligation to maintain strict secrecy about the process till 15 years, and this is despite the fact that as per Article 12, the contract is to terminate on completion of 1O years. In this connection it was submitted by the learned counsel that by getting the right to use the know-how the assessee had become a member of the privileged club, and as a matter of cooperation it was in the assessee's own interest to protect the secrecy. But the same has to be viewed from a different angle. The assessee acquired merely the right to use the know-how and nothing further. Unlike the sub-licensor, the sub-licensee (i.e. the assessee) has no authority to disclose the know-how to anyone.

35. The next is Article 11 of the contract on which much stress has been laid by the learned counsel.

It would be advantageous to reproduce the same for immediate reference :

Article 11 - "Assignment"

"This contract shall inure to the benefit of and be binding upon the parties and shall not be assignable in whole or in part by either party without the prior written consent of other party, provided that such consent shall not be unreasonably withheld. However, the contract shall be freely assignable to the successor of substantially the entire business of either party. In the, event of a permitted assignment the assigning party shall remain primarily liable for the performance of this contract and shall, prior to the assignment cause the assignee to furnish to the non-assigning party an undertaking to be fully bound by the terms and conditions of this contract. Any purported assignment not fully in accordance with this Article 11 shall be void."

36. In this connection it was submitted by the learned counsel that besides the sub-licensor, the assessee also had a right to assign this contract to another party. Though consent of the other party was required, the other party could not withhold the consent for an unreasonable cause. Thus, it was contended that if the assessee assigned the contract after obtaining the consent of the Italian Company, the latter was bound by such assignment. It was vehemently stressed that the truncation of the assigning rights was in mutual interest.

37. It has to be appreciated that truncation of the assigning right is not merely with regard to obtaining the consent of the other party. The truncation is much more. The assigned party remains primarily liable for the performance of the contract. It is only when for some good reason the assessee is not in a position to perform its part of the contract, it may ask someone else, with the consent of the sub-licensor, to make use of the know-how on its behalf under this very contract. But it can neither grant a sub-licence to use the process nor can it divest itself from this contract save as provided in Articles 12 and 13.

38. Then Article 12 was referred to by the learned counsel. It is as follows :

"Article 12 ... Term of the contract 12.1 ... This contract shall come into force on the effective date and, unless sooner terminated as provided for in Article 13, shall continue in full force and effect till the 10th anniversary of the effective date except for secrecy obligations under Article 8 which shall survive.

12.2 ... From and after the expiration of the term of contract as specified in Article 12.1'the sub-licensee shall have acquired the fully paid-up right to continue the production of the product in the plant and to sell the product anywhere in the world without payment of any further consideration in addition to those already paid under the contract.' The above Article, it was submitted, placed the assessee in a strong position than merely acquiring the right to use the know-how, and in particular Article 12.2 placed the assessee in a much stronger position after 10 years which fact according to the learned counsel, placed the assessee somewhere in between box one and two as referred to earlier in para 22.
39. I am afraid, the contention of the learned counsel has not convinced me. By virtue of Article 12 also, the assessee has acquired nothing more than a right to use the know-how. It is only after the expiration of the term of contract as per Article 12.1, the assessee acquires fully paid-up right to continue the product. Hence, before that it does not possess any right fully except to use the know-how under the terms of contract for which the impugned payment, as mentioned in para 3 of the order of my learned Brother, is to be made.

40. In the light of the above discussion, I have no hesitation in upholding the order of the learned CIT(A).

41. It was submitted by the learned counsel that Articles 7.1 and 13.1 of the DTAA say the same thing, but Article 13.2 of the DTAA says something else, and hence it was suggested that the said Article 13.2 should be read down. I have considered this aspect but do not see any force in the suggestion.

42. A reference was made to the commentary by Kanga & Palkhiwala, 8th edition, page 2, wherein it is mentioned that if the interpretation of a fiscal enactment is open to doubt, the construction most beneficial to the subject should be adopted, even if it results in his obtaining a "double advantage".

Since I have arrived at the conclusion without harbouring any doubt, the question of holding it otherwise does not arise.

43. A reference was also made to the Vienna Convention on the Law of Treaties, to which India is a signatory, wherein it is declared that Agreements entered into between two countries should be followed peacefully by each country and the agreements should be interpreted in good faith. 1 have certainly kept the principles of the Vienna Convention in mind while interpreting the DTAA between India and Italy, which is an Agreement, not only for the avoidance of double taxation but also for the prevention of fiscal evasion.

44. In the result, the appeal of the assessee is dismissed.

REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We, the Members of the Jaipur Bench of the Tribunal have differed in the order to be passed in the case of Modern Threads (India) Ltd. v. DCIT [IT. Appeal No. 378 (Jp.) of 1997]. The question on which we have differed is referred to the Hon'ble President under section 255(4) of the Income-tax Act, 1961. The said question is as follows :

"Whether, the amount of US $ 250 lakhs and US $ 35 lakhs payable by the assessee to M/s. Tecnimont of Italy is 'Royalty' as defined in the Double Taxation Avoidance Agreement between India and Italy and hence liable to tax in India ?"
We direct the Registry to put the file before the Hon'ble President.

Third Member Order Nathu Ram A.M.

1. On account of difference of opinion between the Judicial Member and the Accountant Member of Jaipur Bench of the Income-tax Appellate Tribunal, following question has been referred to me by the President of the Tribunal as per provisions of section 255(4) of the Income-tax Act, 1961 for adjudication as a Third Member :

"Whether, the amount of US $ 250 lakhs and US $ 35 lakhs payable by the assessee to M/s. Tecnimont of Italy is 'Royalty' as defined in the Double Taxation Avoidance Agreement between India and Italy and hence liable to tax in India

2. Though the facts have been discussed elaborately in the orders of the lower authorities as well as by Brother Members, but for proper appreciation I would like to recapitulate the facts in brief 'M/s. Modern Threads (India) Ltd. (hereinafter referred to as the sub-licensee) entered into a contract on 15th December, 1995 with Tecnimont SPA of Italy (hereinafter referred to as sub-licensor) for grant of rights and sub-licence to use the process and technical know-how and supply of basic process engineering documentation. The Ministry of Industry in its letter dated 27th March, 1996 conveyed the approval to the project. An addendum to the contract agreement executed on 15th December, 1995 was made on 15th January, 1996 between both the parties providing for some mutually agreed changes in the original contract. The addendum was further amended on 3rd February, 1996. The Ministry of Industry in its letter dated 15th July, 1996 conveyed the approval to the changes carried out through addendum in the original contract agreement.

2.1. Sub-licensor had the availability and access to technical information and know-how of a confidential nature related to the process for the production of purified telephthalic acid ("PTA") owned by Inca International SPA of Italy (hereinafter referred to as "licensor"). The licensor authorised the sub-licensor to grant such sub-license and rights under the know-how to the sub-licensee. The sub-licensor in the contract agreed to grant rights and sub-licensee to use and practice the process in India and to use and sell the product manufactured and also to supply the know-how and documentation for the design, construction and operation of the plant on various terms and conditions set out in the contract agreement. In consideration of the rights and sub-license granted the assessee (sub-licensee) was required to pay to the sub-licensor US $ 250,00,000 net of taxes imposed in India to be paid in the following instalments :

a. 30% on or before the effective date;
b. 30% not later than six months from the effective date;
c. 30% not later than 18 months from the second instalment;
d. 10% at the plant acceptance date or within 48 months from the effective date, whichever is earlier.

2.2. For the supply of basic process engineering the assessee (sub-licensee) was required to pay to the sub-licensor US $ 35 lakhs net of any taxes imposed in India in the following instalments :

a. 30% on or before the effective date;
b. 30% not later than four months from the effective date;
c. 30% not later than 8 months from the effective date;
d. 10% not later than 18 months from the effective date.

2.3. In addition the assessee (sub-licensee) was required to pay to the sub-licensor a running royalty payment of US $ 5 per MT of products, manufactured in the plant after the plant acceptance date, upto a maximum of US $ 50 lakhs.

2.3.1 As per the terms of the contract Agreement the first instalment of 30% of US $ 250 lakhs which worked out to US $ 75 lakhs and 30% of US $ 35 lakhs which worked out to 10.5 lakhs US $ was payable to the sub-licensor. The assessee (sub-licensee), therefore, made an application before the Dy. Commissioner of Income-tax, Special Range-2, Jaipur for the grant of "No Objection" to the remittance of the said amount of first instalment to the sub-licensor as per provisions of section 195(2) of the Income-tax Act. The Assessing Officer having considered the various articles of the Contract Agreement and Article 13(3) of the Double Taxation Avoidance Agreement between India and Italy held that payable amount is royalty and the same is taxable in the hands of the assessee (sub-licensee) as an agent of the foreign company. He, accordingly, directed to deduct tax at source @ 20% as per provisions of the Double Taxation Avoidance Agreement. The assessee (sub-licensee) carried the matter in appeal and the CIT(Appeals) for the detailed reasons given in her order upheld the action of the Assessing Officer after duly considering the facts and placing reliance on the decisions of the ITAT Special Bench in the case of Graphite Vicarb (India) Ltd. (supra) and order of the CIT(Appeals), Bombay in the case of Gujarat Apar Polymers Ltd.

2.4. Before the Tribunal, it was claimed on behalf of the assessee company that as per terms of the contract the Italian company was to transfer technical know-how and to supply basic process engineering documentation. The amount payable under the contract, therefore, is not royalty as per Article 13(3) of the Double Taxation Avoidance Agreement ("DTAA") applicable in reference to the General Tax Law and accordingly no tax at source was required to be deducted there from. A reference was also made to the Vienna Convention wherein it is mentioned that the agreement entered into between two countries should be followed honestly and peacefully by each of the Government. It was also claimed that the Italian company does not have a permanent establishment in India and as such no tax is payable in India on such payments. It was also claimed that the assessee-company ultimately would become the owner of the formula as per the terms of the contract agreement on expiry of fifteen years. It was, therefore, argued that the payments made as per the contract was not taxable in India as per the Double Taxation Avoidance Agreement and in support reliance was placed DCM Ltd.'s case (supra) wherein on similar facts the matter was decided by the Tribunal in favour of the assessee.

2.5. The learned D.R. on the other hand supported the orders of the authorities below placing reliance on Alembic Chemical Works Co. Ltd 's case (supra), N. V. Philips's case (supra) and also 27 ITR 407 (sic); B. M. Kharwar's case (supra) and Pandit Lakshmikanta Jha's case (supra).

2.6 In reply it was claimed by the learned counsel of the assessee that the amount paid can be treated as royalty under section 9(1)(vi) of the Income-tax Act but these provisions are overridden by section 90 under which the Government of India entered into Double Taxation Avoidance Agreement with the Government of Italy and the payments made are, therefore, governed by the provisions of the DTAA. It was further stated that the cases relied upon by the Revenue as quoted in Alembic Chemical Works Co. Ltd.'s case (supra) and N. V. Philips' case (supra) are distinguishable on facts.

3. The learned Judicial Member has taken the view :

(i) That the term "Royalty" has been defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act but its definition as given in the Double Taxation Avoidance Agreement between India and Italy executed as per provisions of section 90 of the Income-tax Act would prevail over that provided in the Income-tax Act. According to him, in view of decisions in the cases of DCM Ltd. (supra) and Citizen Watch Co. Ltd. (supra) the amount payable by the assessee is neither royalty under section 9(1)(vi) of the Income-tax Act nor under DTAA.

(ii) That as per Article 7 of the DTAA the profits of enterprise of a contracting State would be taxable only in that State unless the enterprise carries on business in the other contracting State through a permanent establishment situated therein. There is no permanent establishment of the Italian Company in India. The amount payable in instalments to Italian company being business profit is not taxable in India as per provisions of DTAA.

(iii) That as per Article 8.4 of the contract agreement, the sub-licensee's secrecy obligations would terminate fifteen years after the effective date. That shows that after fifteen years the assessee would be free to use know-how as per its will. It is inferred therefrom that the assessee became the owner of the rights which he got through contract agreement.

(iv) The case laws relied upon by the Revenue were found to be distinguishable on facts.

(v) The learned J.M. concluded that the payments made did not constitute "royalty" as defined in Article 13(3) of the DTAA between India and Italy. The appeal of the assessee was thus held allowable.

3.1. On the other hand, the learned A.M. observed that there is no difference of opinion between the Revenue and the assessee that in view of section'90 the definition of royalty as given in Double Taxation Avoidance Agreement between India and Italy shall prevail over the definition given in section 9(1)(vi) of the Income-tax Act and accordingly he agreed with the view taken by the learned J.M. in this behalf. The learned A.M. then considered the facts in the case of DCM Ltd. (supra) and found that the same was distinguishable on two counts - firstly in DCM Ltd.'s case (supra) there was transfer of comprehensive information and know-how whereas in assessee's case the Italian Company as a sub-licensor had granted the rights and sub-licence to use and practice the process in India; secondly, in DCM Ltd.'s case (supra), DCM had purchased equipment and know-how whereas in the instant case there was neither the purchase of equipment nor the know-how but merely right to use the process was acquired. Further, it is also not the case of the assessee, as made out in the case of DCM, that the case would be governed by articles relating to profits. Accordingly, the decision in the DCM Ltd.'s case (supra) has no application to the facts of the case.

3.2. The learned A.M. further noted that the main thrust of the learned counsel was that it was not merely the right to use process that the assessee acquired but there was something more than that and according to him a bundle of rights had been acquired by the assessee. He considering the meaning of the term "Licence" as given in T. P. Mukerjee's Law Lexicon, Vol. 2 (1982 Edition) and P. Ramanatha Iyer's Law Lexicon (1997 Edition) and referring to Article 2 of the contract agreement observed that the assessee acquired only a right to use the know-how by virtue of a sub-licence granted under the contract between the assessee and the Italian Company and nothing more than that was acquired. The assessee has not acquired the ownership of the know-how as the preamble of the Contract makes it clear that the same is owned by INCA International SPA, Italy and the sub-licensor has only the right to sub-licence technical know-how. The assessee has not acquired similar rights under the contract.

3.3. The learned A.M. has further noted that as per Article 8 of the contract agreement the assessee is under obligation to maintain strict secrecy about the process till fifteen years despite the fact that the contract is to terminate on completion of ten years. Unlike the sub-licensor the assessee has no authority to disclose the know-how to another party.

3.4. Further, meeting the arguments of the learned counsel on Article 11 of the Contract, about assignment, he observed that the right could be assigned to any other party with the consent of the sub-licensor. Therefore, tinder his Article, the assessee company could neither grant a sub-licence to use the process nor could it divest itself from the contract and as such, assigning right with the assessee company is a truncated one.

3.5. As regards the claim that as per Article 12 of the contract agreement the assessee company would acquire full right to use the technical know-how after the expiry of ten year, the learned A.M. has observed that the assessee company has acquired nothing more than a right to use the know-how and it is only after the expiration of the terms of contract that the assessee company would acquire fully paid up right to continue the product only.

3.6. On these considerations, the learned A.M. upheld the order of the CIT(Appeals).

3.7. Thus, as per the finding given by the learned J.M. the payment made to the Italian Company under the contract is a business profit and not royalty whereas the learned A.M. has upheld the action of the lower authorities in treating the said payments as royalty. It is in this background that the question as set out in para 1 above has been referred under section 255(4) of the Income-tax Act by the President for decision to me as Third Member. 1 have heard both the parties on the issue involved.

4. The learned counsel of the assessee Shri N. M. Ranka has reiterated the submissions made before the lower authorities and has further made a submission that the contract entered into between the assessee company and the Italian Company provides for collaboration for setting up a plant in India as per the technical know-how and basic process engineering documentation provided by the Italian Company for the manufacturing of PTA. The contract provides for grant of rights and sub-licence to the assessee company to use and practice the process in India and to supply know-how and documentation for the design, construction and operation of the plant as per terms set out in the contract.

4.1. He further submitted that as per Law Lexicon the word "Grant" is described :
"Grant. An operative word of conveyance, particularly appropriate to deeds of grant, properly so called, but used in other conveyances also, such as deeds of bargain and sale, and leases.

1. The action of granting or bestowing; an authoritative bestowal or conferring of a right; a gift or assignment of money etc., out of a fund (S. 13, Industrial Development Bank of India Act); 2. The thing granted or bestowed; 3. to bestow by a formal act (S. 24A(a) Companies (Profits) Surtax Act and S. 42, Prov. Plantations Labour Act); 4. to accede to (S. 432(2), CrPC).

"This word is taken largely where anything is granted or passed from one to another. And in this sense it both comprehend feoffments, bargains and, sales, gifts, leases, charges, and the like; for he that doth give, or sell, doth grant also. And thus it is sometimes in writing or by deed, and sometimes it is by word without writing. But the word being taken more strictly and properly, it is the grant, conveyance, or gift, by writing of such an Incorporeal thing as lieth in grant, and not in livery, and cannot be given or granted by word only without deed. Or it is the grant by such persons as cannot pass anything from them but by deed, as the king, bodies corporate, & c. And this albeit it may be made by other most proper to this purpose".

4.1.1 It is therefore, contended that the word "Grant" includes transfer of right, interest, title and possession and accordingly the assessee has acquired the right to the Process & Technical know-how and also right to transfer them after the specified period as per terms of the Contract. Moreover, the Italian Company also supplied technical know-how and documentation for design, construction and operation of the Plant and it amounted to acquisition in the hands of the assessee company for a consideration. The payment made for providing technical know-how and documentation was, therefore, not royalty but business profit of the Italian Company and it having no permanent establishment in India, the amount payable therefor is not taxable in India. In support he has cited the following decisions :

a. DCM Ltd.'s case (supra);
b. Citizen Watch Co. Ltd.'s case (supra);
c. Rolls Royce Ltd. v. Jeffrey (Inspector of Taxes) [1965] 56 ITR 580 (HL);
d. CIT v. Gilbert & Barker Mfg. Co., USA [1978] 111 ITR 529 (Bom.);
e. Swadeshi Polytex Ltd. v. ITO [1991] 38 ITD 328 (Delhi);
f. Graphite Visard India Ltd.'s case (supra);
g. CIT v. Koyo Seiko Co. Ltd. [1999] 102 Taxman 291.

4.2 The learned counsel further placing reliance on Article 11 of the Contract submitted that provision made therein has not been properly appreciated. The technical know-how received is assignable in whole or in part to another party with the Written consent of the sub-licensor and such consent is not to be unreasonably withheld. In support of this proposition, he has placed reliance on the decision of the Hon'ble Supreme Court in the case of Kamala Ranjan v. Vaijnath Bajoria AIR 1951 SC 1 and Shankar Prasad Goyanka v. State of Madhya Pradesh AIR 1965 MP 153.

4.3 The learned counsel has further pointed out that the contract provides for grant of sub-licence and assignment of the technical know-how. The expression of these terms in the contract make it clear that the technical know-how and related documentation have been transferred to the assessee company by the sub-licensor and there is nothing in the contract that the same have not been provided, supplied or transferred to the assessee company. He further made a submission that the provisions of section 195 read with terms of the Contract and DTAA are required to be construed and interpreted liberally and beneficially in favour of the assessee company and in support of such proposition, he has placed reliance on the following decisions :

(i) CIT v. J. K. Hosiery Factory [1986] 159 ITR 85 (SC);
(ii) Mansinghka Bros. P. Ltd. v. CIT [1984] 147 ITR 361 (Raj.);
(iii) CIT v. Gwalior Rayon Silk Mfg. Co. Ltd [1992] 196 ITR 149/62 Taxman 471 (SC);
(iv) Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC);
(v) CIT v. Dharam Chand [1993] 204 ITR 787/70 Taxman 390 (Raj.);
(vi) CIT v. Trinity Hospital [1997] 225 ITR 178 (Raj.); and
(vii) CIT v. Shyam Finance P. Ltd. [1998] 231 ITR 308 (SC).

4.4 The learned counsel arguing further submitted that the Revenue authorities have not examined and considered the provisions of the contract as a whole but they have been carried away by the words "right to use" in the contract. He submitted that it is not the form but the substance of the transaction that matters and in support he placed reliance on the decisions reported in the following :

(a) Devidas Vithal Das & Co. v. CIT [1972] 84 ITR 277 (SC);
(b) CED v. Aloke Mitra [1980] 126 ITR 599 (SC);
(c) Associated Hotels of India Ltd. v. R. N. Kapur AIR 1959 SC 1262;
(a) Ram Niwas v. Municipal Board Nawabganj AIR 1976 All. 241.

4.5 The learned counsel of the assessee has further made a submission that the sub-licensor under the authority of licensor was the owner of the technical know-how and basic process engineering documentation and on supply of the same to the assessee company was entitled to receive the consideration. The tax liability would therefore lie on the sub-licensor being the recipient of the said amount and in support of such proposition the learned counsel placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Poddar Cement P. Ltd. [1997] 226 ITR 625.

4.6 The learned counsel of the assessee, therefore, contended that the payment made was business income of the Italian Company as paid in consideration of supply of technical know-how and documentation and the Italian Company admittedly having no permanent establishment in India no tax thereon was liable to be paid on its remittance by the assessee company as an agent as per terms of DTAA. He, therefore, pleaded that the view taken by the learned J.M. is justified on facts as well as in law and the same deserves to be endorsed.

4.7 The learned D.R. Shri N. S. Dayam on the other hand relied upon the orders of the Assessing Officer as well as the CIT(A). He also carried me through the relevant Articles of the contract and further submitted that Italian company provided the documentation data and right to use the secret formula or process for the manufacture of PTA. This also included the right to use the design of the plant necessary for manufacture of the PTA. The assessee company otherwise has not made any outright purchase of exclusive rights over the technical know-how. The amount paid of US $ 250 lakhs and US $ 35 lakhs as consideration for the use of or right to use the secret formula or process.

Moreover, the assessee company cannot transfer the technical know-how to any other person and this right has been retained by the foreign company. He also argued to show that the facts of the case of Graphite Viscarb India Ltd (supra) are distinguishable. The learned D.R. further adopting the reasoning given by the CIT(A) in para 2.5 of the appellate order contended that the payment made is a royalty and the same is taxable in India as per Article 13 of the Double Taxation Avoidance Agreement. In support he has also placed reliance on the following decisions :

(a) N. V. Philips' case (supra);
(b) CIT v. Krebs & Co. [1998] 229 ITR 615 (MP).

4.8 In reply the learned counsel of the assessee pointed out that articles 11, 8.4 and 5.6 of the contract which were material to the issue involved have not been considered by the CIT(A) and therefore the conclusion reached by the CIT(Appeals) is vitiated. Moreover, on expiry of the contract period of ten years, the assessee will have full right to transfer the technical know-how received as per terms of the contract agreement. This aspect has been totally overlooked by the CIT (Appeals).

4.9. The learned counsel has further submitted that the case in N. V Philips' case (supra) is distinguishable on facts and the another case cited by the learned D.R. in Krebs & Co.'s case (supra) not under Double Taxation Avoidance Agreement is also not applicable to the facts of the present case.

5. I have carefully considered the facts, rival submissions and have also gone through the orders of the lower authorities. Orders of the learned J.M. and learned Accountant Member, provisions of contract, double taxation avoidance agreement etc. and also the various case laws cited for and against. Before I advert to the question whether the said amount payable is royalty or not, 1 would like to discuss and consider the nature and scope of the contract Agreement entered into by the assessee company with the Italian company for proper appreciation.

5.1 The preamble of the contract Agreement mentions that the assessee company was interested in building in India a plant for the production of PTA and wanted to be granted the rights and sub-licence to use and practice the Process and to be supplied with technical documentation in accordance with the process and technical assistance for the implementation of the Plant. The Sub-licensor under the authority from the Licensor agreed to grant to the assessee company the rights and sub-license to use and practice the Process in India and to use and sell the product so manufactured and was willing to supply the assessee company with know-how and the documentation for the design, construction and operation of the plant as per the terms and conditions set out in the contract Agreement.

5.1-1 The material terms used have been defined in Article 1 of the contract Agreement as under:

"(1) Basic Process Engineering shall mean the process engineering documentation in accordance with the Process and the Technical know-how to be provided by the Sub-licensor. The documentation includes the items listed in Exhibit 1 to the contract such as;

(a) Process giving details and description of raw-material; auxiliary materials; catalysts and chemicals, characteristics of utilities; necessary information concerning raw material, chemicals and catalysts including physical property, list of major manufacturers or vendors; consumption rates of all raw materials, chemicals and catalysts at different levels of production; plant capacity; information on plant effluents and wastes including recommended treatment; Process flow sheets; preliminary material balance with composition and operating conditions of process fluids including flowrates, composition, phase, temperature, pressure, operating and standard specific gravities, densities and molecular weights for gases and vapours, heat content, final material balance; utilities requirements for operation of plant such as steam, cooling, water and demi-water, nitrogen, oxygen and hydrogen; equipment list; supervisory operating manual; Analytical methods and procedures;

General safety information for the operation of the plant; Prescriptions and/or suggestions concerning particular process requirements to the effect of instrumentation, electrical system, ventilation, air conditioning, lighting, type and materials of civil works, insulation, painting.

(b) Piping
(c) Instrumentation;
(a) Electrical;
(e) General layout and plot plan;

(f) Apparatus and machinery relating to vessels and columns; heat exchangers; pumps and agitators; compressor and blowers; package units and miscellaneous equipment.

(g) Check, review and approval from the process and process guarantee point of view of the final issue of the following detailed engineering items : plot plans with equipment layout; piping and instrumentation diagrams; critical lines piping assembly and isometric drawings; Vendors drawings for critical equipment and machines; their check, review and approval would be done by the Licensor.

2. Basic Process Engineering - Effective date shall mean the date on which the contract comes into force as per article 15;

3. Plant - Plant shall mean the assessee's facilities for the production of product in accordance with the technical know-how and basic process engineering as per Ext. 4 to the contract with the capacity of 2,50,000 MT of product per year during 7992 operating hours to be constructed and operated in India;

4. Process - Process shall mean the process by disclosure for the production of product, including..

(a) A process for the liquid phase, oxidation with air or other source of molecular oxygen, of p-xylene, in which process, metallized catalysts are employed for the purpose of assisting and/or promoting such oxidation;

(b) a process for the separation of terephthailc acid from the reaction mixture of the process referred to in sub-paragraph (a) above and solvent recovery;

(c) a process for the purification of terephthalic acid which includes the steps of treating a solution of terephthalic acid under reduction conditions, and subsequently Crystallizing and recovering such purified acid from such solution.

6. Technical Know-How - Technical know-how shall mean all technical, engineering and manufacturing information, knowledge and experience whatsoever, patented and/or not patented and relevant to the product and the process which by themselves are sufficient to enable sub-licensor to design the plant and sub-licensee to operate the plant successfully and which sub-licensor and/or licensor is free to disclose at the effective date and thereafter for the life of the contract. The patent list is described in Exhibit 5 which includes :

(a) Method for recovering in active form, the components of the catalytic system in the synthesis of terephthalic acid;

(b) Method for the recovering of the solvent and of the by-produced methylaceate in the synthesis of terephthalic acid;

(c) Process for the recovery of the solvent and of the by-produced methylacetate in the synthesis of terephathalic acid.

(d) Method for catalyst preparation in the terephathalic acid synthesis process.

6.1 Article 2 of the Contract provides that subject to the terms and conditions of the contract the sub-licensor grants to the sub-licensee the non-exclusive right and sub-licence :

(a) to use the process and the technical know-how for the implementation of the plant to the extent required to erect and operate the plant and to manufacture thereby the product; and

(b) to use and sell the product so manufactured in the territory which includes : all countries of the word except Europe, former USSR, countries all American countries and Middle East countries including Turkey and Iraq;

(c) for the purpose of practising the sub-license granted, sub-licensor shall disclose to the sub-licensee, process and technical know-how in the manner prescribed.

(d) the sub-licensor grants to the sub-licensee the rights to use the basic process engineering for the design, engineering, construction and operation of the plant only.

6.2 Article 3 of the Contract provides for supply of basic process engineering and technical assistance and promptly after the effective date, a Design Conference shall be held in Milano, Italy between the sub-licensor and the sub-licensee to establish the design basis required by the sub-licensor for the preparation of the basic process engineering to be used by the sub-licensee in the engineering, construction and operation of the plant.

6.3 The sub-licensee shall select a Engineering contractor to be approved by the sub-licensor for the preparation of the engineering and construction drawings and specifications for the plant based on the basic process engineering under the supervision of the sub-licensor.

6.4 The sub-licensor shall provide training services relating to the operation and maintenance of the plant safely and efficiently in order to make them adequately familiar with the process. Such training shall be carried out by the sub-licensor at its office and at sub-licensor's plant or at any other licensed plant using the same process. The training envisages for theoretical part about the main process features and a practical part on the selected plant.

6.5 Sub-licensor shall make available its technical representatives skilled in the Process to assist and advice Sub-licensee at the site, in the Plant check up, precommissioning, commissioning, start-up and initial operation of the Plant and to supervise the Test runs for an agreed period.

6.6 Article 4 of the contract provides for guarantees about design and construction of the Plant; selection of equipments employed in the plant, type and regular operation of the plant; steady and sufficient supply of proper raw materials, auxiliary materials and utilities process performance etc. and in case of any defect or problem found the same are to be rectified by the Sub-licensor to the extent prescribed.

6.7 The financial liability if any in putting the plant to proper operation as per terms of the contract after removing designing, engineering, structural etc. defects, if any, is to be borne by the Sub-licensor to the extent of 40% of the amount to be paid under Article 5.1 of the Contract i.e., US $ 250 lakhs for supply of technical know-how.

 6.8 Article 5 provides for consideration to be paid for supply of Technical Know-how, basic process engineering and payment of royalty as per details given above.

6.9 In addition the assessee company is required to pay for the travelling, boarding and lodging expenses of its personnel to be trained at the selected plant. For training facilities the assessee company is to pay to the trainers of the sub-licensor at net rate of US $ 720 per day for training services carried out in Italy and of US $ 800 per day for training services carried out outside Italy.

The assessee company is also to pay to the technical personnel of Sub-licensor deputed at site at daily rate of US $800/720.

6.10 Article of the Contract provides for mode of payment to the sub-licensor.

6.11 Article 7 of the Contract provides for future cooperation in the updating of the process and technical know-how in manufacturing of TPA.

6.12 Article 8 provides for secrecy. The assessee company undertakes not to disclose and to bind its personnel having access to the technical know-how not to disclose to other all or any part of the technical know-how, basic process engineering and/or any other information supplied by the sub-licensor to the sub-licensee under the contract.

6.13 The assessee company agrees that it will use the technical know-how and basic process engineering only to design, construct and operate the Plant.

6.13-1 The assessee company's secrecy obligations under Article 8 shall terminate fifteen years after the effective date.

6.14 Article 9 provides for protection against patent infringement.

6.15 The maximum financial liability of the sub-licensor for all expenses, indemnifications, reimbursements costs of plant modifications to avoid infringement, legal cost relevant to the defence and disposal of suit or action including claims under Articles 4 & 9 shall be to the extent of 80% of the amount to be paid under Article 5.1 i.e., US $ 250 lakhs for supply of technical know-how.

6.16 Article 10 of the Contract provides for liabilities of the sub-licensor to the extent of 80% of the total amount received of US $ 250 lakhs.

6.17 Article 11 of the Contract provides that the Contract shall inure to the benefit of and be binding upon the parties and shall not be assignable in whole or in part by either party without the prior written consent of the other party, provided that such consent shall not be unreasonably with-held.

However, the contract shall be freely assignable to the successor of substantially the entire business of either Party. In the event of permitted assignment the assigning party shall remain primarily liable for the performance of this contract and shall, prior to the assignment, cause the assignee to furnish to the non-assigning party an undertaking to be fully bound by the terms and conditions of this contract. Any purported assignment not fully in accordance with this Article 11 shall be void.

6.18 Article 12 of the Contract provides that the contract shall come into force on the effective date, and shall continue in full force and effective till the 10th anniversary of the effective date except for secrecy obligations under Article 8 which shall survive upto fifteen years. On expiry of the terms of contract the assessee company shall have acquired the fully paid up right to continue the production of the product in the plant and to sell the product anywhere in the world without payment of any further consideration in addition to those already paid under the contract.

6.19 Article 19 provides that the following seven exhibits shall form an integral part of the contract.

Exhibit-1 Basic Process Engineering.
Ext. 2 Terms & Conditions for technical assistance
Ext. 3 Technical specifications and process performance guarantees.
Ext. 4 Process description.
Ext. 5 Patent list.
Ext. 6 Form of secrecy agreement.
Ext. 7 Battery limits.

6.20 On close reading of the Contract Agreement as a whole following position emerges:

(a) That the Contract Agreement provides for collaboration with the Italian Company for setting

 (b) That the sub-licensor has granted to the assessee company the right and sub-licence to use 

(c) That the Italian Company, as the preamble indicates, would supply the technical know-how and 

(d) That the assessee company would pay US $ 250 lakhs for supply of technical know-how and the sub-licensor is liable to bear the loss to the assessee company on account of defect in designing, construction or operation of the plant or on account of litigation, if any, relating to the technical know-how used to the extent of 80% of US $ 250 lakhs payable. 

(e) That the assessee company has undertaken to pay US $ 35 lakhs for supply of Basic Process Engineering Documentation for designing, construction and operation of the plant as per the Technical know-how and this payment is not subject to any restrictions as in the case of amount payable for supply of technical know-how.

That the assessee company would pay royalty of US $ 5 per metric ton of product to Italian company subject to maximum of US $ 50 lacs.

(g) That the Italian Company would provide technical personnel for supervision of erection, construction and operation of the Plant and they would be paid at the rates prescribed.

(h) That the Italian Company would also train the technical personnel of the assessee company in its own office or in the plants outside India and the cost of the training is to be borne by the assessee company as prescribed.

(i) That the assessee company has a right to assign the contract to its successor also to a third party with the prior written consent of the sub-licensor and such consent is not to be withheld unreasonably on expiry of contract period, the assessee company would have absolute right to transfer the technology acquired.

(j) That the contract agreement provide for payment of consideration separately for supply of technical know-how and basic process engineering documentation and royalty payment for use of process/secret formula for manufacturing of PTA and this has been duly approved by the Govt. of India. Thus such separate payments provided are not of the same character.

6.21 Under the Contract Agreement, the assessee company has been granted the right and sub-licence to use the Process and technical know-how. The word "grant" has been defined in Venkataramaiya's Law Lexicon - Second Edition (4th Vol.) to mean : that the work is taken largely where anything is granted or passed from one to another. And in this sense it does comprehend feoffments bargains and sales, gifts, lease, charges and the like, for he that does give or sell, does grant also.

6.22 The word "Grant" has also been defined in K. J. Aiyer's Judicial Dictionary (8th Edition 1980):

Literally permission and thus a gift, the implication being that such a gift carries with it a privilege of some kind. It is thus used especially in law where it means the conveyance of property from one person to another by deed.

6.23 The term "Licence" has been described in T. P. Mukherjee Law Lexicon Vol. 2 (1982 Edition) - an authority justifying the doing of what otherwise would be wrongful. In the commonly accepted sense, the term means authority, or permission to do something specified, leave to do a thing which the licensor. would otherwise have the right to prevent.

6.24 The term "Licence" has further been described in P. Ramnatha Aiyer's "Law Lexicon" 1997 Edition - as an authority to do something which would otherwise be in operative wrongful or illegal; a formal permission from a constituted authority to do something. In the popular as also in the legal sense, a licence is a permission to do something which without the licence would not be lawful.

6.25. The word "Right" has been defined in K. J. Aiyer's Judicial Dictionary (8th Edition 1980) to mean - Claim a thing. That which is so directed for the protection and advantage of an individual is said to be his right. It is the liberty of doing or possessing something consistently with law. A right is an interest which is recognised and protected by law.

6.26 Looking to the judicial meaning of the words "Grant", "Right" and "Licence" as described above, the act of the Sub-licenser in granting the right and Sub-licence to use the Process and technical know-how amounts to transfer of the right, interest, title and possession of the Process for the production of PTA as per the technical know-how developed by the Licensor to the assessee company. However, simple grant of such right and licence is meaningless unless necessary facility for production of PTA as per the Process and technical know-how is created and for this purpose the Sub-licensor agreed to supply necessary technical know-how and basic Process Engineering Documentation for designing, construction and operation of the plant for consideration. The word "Supply" as per T. P. Mukherjee's Law Lexicon (Vol. 2 1982 Edition) is merely a form of sale and despatch, and unless there was sale there was no supply of goods. (Karamchand Thapar & Bros. v. State of Bihar [1956] 7 STC 58 (Pat.). The words sale and supply go together. Since the Sub-licensor has supplied the technical know-how and Basic Process Engineering Documentation for a consideration the transaction amounts to sale in the hands of Sub-licensor and purchase in the hands of the assessee company. It is also noted that the consideration charged for supply of technical know-how is subject to the liability on account of loss suffered, if any, by the assessee company on account of rectification of the fault, if any, in designing, construction and operation of the plant and also on account of litigation with a third party for infringement of patent right etc. to the extent of 80% of the consideration charged. The claim of such liability in the hands of the sub-licensor against the consideration received could be claimed only if the amount received is taken as a business profit in the hands of the Sub-licensor and income therefrom is assessed in Italy, as the Sub-licensor having no permanent establishment in India is not taxable on such business profit in India. Moreover, intent of the contract Agreement has to be construed and interpreted liberally in favour of the sub-licencee as per, ratio of various precedents cited.

6.27 I would now advert to the main controversy whether the remittance made by the assessee company, sub-licensee is a royalty or business receipt of sub-licensor. It is noted in this regard that as per provisions of Section 90, the Government of India entered into an agreement with the Government of Italy for Double Taxation relief as per Notification No. 10075 dated 25th April, 1996.
As per Article 7 of the DTAA, the profit of an enterprises 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. As per sub-clause (6) of Article 7, where profits include items of income which are dealt with separately in other Articles of the convention, than the provisions of those Articles shall not be affected by the provisions of Article 7.

Article 13 of the DTAA provides for mode of taxation of royalties and fees for technical services. The term "Royalty" as per clause (3) of Article 13 of DTAA means payments of any kind received as a consideration : (i) for the use of, or the right to use any copyright of literary, artistic or scientific work, including cinematography film or films or tapes used for radio or television broadcasting, any patent, trade mark design, or model, plan, secret formula or process, or (it) for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

6.28 The term "Royalty" in the DTAA has been given a restricted meaning as compared to the term "Royalty" defined in Explanation 2 to Section 9(1)(vi) of the Income-tax Act reproduced hereunder :

"Explanation 2 - For the purposes of this clause, "royalty" means consideration (including any lumpsum 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, 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;

(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)."

6.29 However, as per Board's Circular No. 333 (F.No. 506/42/81-FTD) dated 2nd April, 1982 where a Double Taxation Avoidance Agreement provides for a particular mode of computation of income, the same should be followed irrespective of the provisions in the Income-tax Act. Since the Double Taxation Avoidance Agreement with the Government of Italy provides for mode of computation of income the question of taxability of the amount of payment has to be considered in accordance thereof and there is also no dispute in respect thereof. It is, therefore, required to be examined whether the amount of payment of the Italian company as per the terms of the Contract Agreement fall within the term "Royalty" or "business profit" under DTAA.

6.30 As per clause (2) of Article 13 of the DTAA, such royalties and fees for technical services may be taxed in the contracting State in which they arise and according to the laws of that State but if the recipient is the beneficial owner of the royalties or fees for technical services the tax so charged shall not exceed 20% of the gross amount of royalties or fees for technical services.

6.31 As per Article 2 of the contract Agreement the Sub-licensor has granted a right and sub-licence to use the Process for manufacturing of PTA. The payment made for use of the Process or secret formula for manufacture of PTA would obviously fall within the definition of the term "Royalty" under DTAA.

6.32 The term "Royalty" has been defined in K. J. Iyer's Judicial Dictionary according to which

"Royalty' has several meanings :

"a. Percentages or dues payable to land-owners for mining rights;

b. Sums paid for the use of a patent;

c. Percentages paid to an author by a publisher on the sales of a book.

"Royalty" was a payment to the owner of minerals for the right of working the same, and that the charging was based on produce. (Sethi Marblestone Industries v. State of Rajasthan AIR 1958 Raj.

140) Royalty is payment which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government. Two important features of royalty have to be noticed : they are, that the payment is made for the privilege of removing the articles in proportion to the quantity removed, and the basis of the payment in an agreement."

6.33 The word "Royalty" has also been described in Black's Law Dictionary (Fifth Edition) to mean compensation for the use of property usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced. A payment which is made to an author or composer by an assignee, licensee or copyright holder in respect of each copy of his work which is sold, or to an inventor in respect of each article sold under the patent.

Royalty is share of product or profit reserved by owner for permitting another to use the property in its broadest aspect, it is share of profit reserved by owner for permitting another the use of property.

In mining and oil operations, a share of the product or profit paid to the owner of the property.

6.34 It is clear from the meaning of the word "Royalty" described that the royalty payment is linked to the production or profits earned through use of process or secret formula, patent, copyright etc.

In the present case Article 5.6 of the contract Agreement provides for payment of a running royalty to the sub-licensor of US $ 5 per metric Ton of product manufactured in the plant upto maximum of US $ 50 lakhs. The payment of the royalty amount is directly linked to the product and the same, would no doubt be taxed as royalty as per article 13 of the DTAA. There is no dispute either about the taxability of the royalty payment as per clause 5.6 of the contract Agreement in the hands of the assessee company as agent of the Italian company.

6.35 The controversy however relates to the payment to be made in instalments to the sub-licensor for supply of technical know-how of US $ 250 lakhs and also for supply of Basic Process Engineering Documentation of US $ 35 lakhs for designing, construction and operation of the plant. This payment thus relates not to the use of any process, secret formula or patent for production of any commodity but for creating as asset in the shape of a plant, designed, constructed and operated as per the technical know-how developed by the Licensor and Basic Process Engineering Documentation provided by the sub-licensor and this payment is required to be made in instalments by the date of completion and start of the plant for production of PTA. Such payment thus made to the sub-licensor as per the contract Agreement. In my considered opinion, does not fall within the term "Royalty" as defined in clause 3 of article 13 of the DTAA. Moreover, as mentioned above, the payment made as per clause 5.1 of the contract Agreement for supply of Technical know-how is also subject to the liability of the sub-licensor to the extent of 80% of the total amount receivable at US $ 255 lakhs on account of rectifying fault, if any, in designing, construction and operation of the plant and on account of litigation imposed by the third party for use of their patent, right, design, process etc. unauthorisedly. As the sub-licensor has supplied by way of sale to the assessee company the technical know-how as well as Basic Process Engineering Documentation for setting up of the plant, the consideration received would undoubtedly be a business profit in the hands of the sub-licensor and the sub-licensor having no permanent establishment in India such business profits are liable to be assessed in the hands of the sub-licensor in Italy and the sub-licensor in that eventuality would also be in a position to claim the liability provided under the contract to the extent of 80% against the business profits received. The payment thus made as per clause (i) & (it) of article 5 of the contract Agreement for supply of technical know-how and Basic Process Engineering Documentation, therefore, in my considered opinion could be assessed in the hands of the sub-licensor in Italy as business profit and not in India as royalty.

6.35-1 The contract Agreement between the assessee company and the Italian company provides for payment for supply of technical know-how and basic process engineering documentation for designing, construction and operation of the plant and it is further provided for payment of royalty for use of the Process as defined in contract for manufacturing of PTA. This has been duly approved by the Government of India. The payment to be made separately for each type of technical assistance to be provided shows that the same are not of the same character and the same have to be treated as such distinctly. The payment for supply of technical know-how and basic process engineering documentation is separate and the same is not royalty similar to that provided in clause (3) of article 3 of DTAA. The payment thus made is nothing but the business profits of the sub-licensor for supply of technical know-how and Documentation and the same is taxable as per provision of article 7 of DTAA and not under article 13(3) of the DTAA.

6.36 I would now consider and discuss hereunder the ratio of various decisions cited for and against the proposition of taxing the said amount as royalty.

(a) In the case of Graphite Vicarb India Ltd. (supra) the assessee, an Indian Company entered into a collaboration agreement with a French Company and according to the agreement the French Company was to transfer outside India technical know-how for the manufacture of impervious graphite equipments. The agreement provided for delivery of related documents and for the transfer of the technical know-how, the assessee was to pay the lumpsum consideration of Rs. 10 lakhs in three equal instalments. The agreement also provided exclusive right to the assessee company to use the said know-how and for a royalty at 3% for the right to use the know-how granted. The agreement was approved by the Government of India. At the time of remittance of first instalment the assessee company claimed that the lumpsum amount payable was not taxable under the terms of Double Taxation Avoidance Agreement between India and France. The Tribunal decided the issue in favour of the assessee holding :

"(ii) That the main question was whether the payment of the lump sum was entitled to exemption.

Under article IR of the Agreement for Avoidance of Double Taxation between India and France, the industrial or commercial profits of an enterprise of one of the contracting states shall not be subjected to tax in the other contracting state, unless the enterprise had a permanent establishment situated in that other Contracting State. Clause 5 of that article states that the term "Industrial or commercial profits" shall not include income from royalties. Article VII provides that royalties derived by a resident of one of the contracting state from sources in the other Contracting State might be taxed in both the Contracting States. Clause (2) of article VII of that agreement defines "royalties" to mean payment of any kind received as consideration for the use of or for the right to use, any copyrights, designs, plans, etc. In other words, the consideration for the right to use technical know-how will be royalty which is subjected to tax in both the countries whereas the consideration for acquisition of the know-how would not be a royalty and consequently, it would be a commercial profit exempt under article III as the foreign company had no permanent establishment in India. Taking advantage of this differentiation, the parties to the collaboration agreement have clearly bifurcated the consideration by stating that the lump sum consideration for transfer of technical know-how abroad will, be an outright sale and would be independent of the royalty at 3 per cent payable for the right to use the know-how. It must be remembered that this bifurcation had been approved by the Government of India. In the circumstances, the second instalment paid under clause 11 of the collaboration agreement was commercial profit within the meaning of article III of the Agreement for Avoidance of Double Taxation between India and France and since, admittedly, the foreign company had no permanent establishment in India, it was not liable to be taxed in India."

(b) In the case of DCM Ltd. (supra), the assessee company entered into a technical collaboration agreement with an U.K. Company for transfer of comprehensive technical information, technical know-how and supply of equipment. The assessee company agreed to pay certain amount in four instalments to the U.K. company as consideration for grant of licence and disclosure of know-how and the U.K. company was to grant right and full but non-transferable licence to practice the defined processes at its existing factories. The Revenue held the view that the remittances made by the company of the agreed consideration constituted royalty as defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act. However, under the Double Taxation Avoidance Agreement entered into between the Government of India and U.K. Government, the definition of royalty did not include provisions as contained in clause (i) & (it) occurring in Explanation 2 to section 9(1)(vi) of the Income-tax Act. The Tribunal held that the consideration paid for drawings, designings, etc. by the U.K. Company to the assessee did not constitute royalty under Explanation 2 to section 9(1)(vi) of the Income-tax Act but actually constituted business profits of the U.K. Company and the same could not be assessed in the hands of the assessee.

(c) In the case of Citizen Watch Co. Ltd (supra), the assessee company entered into an agreement with a Japanese Company for supply of technical know-how for the manufacture of watches and the Indian Company agreed to pay to the Japanese Company, documentation fee, technical assistance fee and royalty. Under Double Taxation Avoidance Agreement between India and Japan fee for technical services were to be treated as income from sources within the contracting state in which services were rendered. The Japanese company accepted liability to income-tax in India with regard to the royalty payment but it claimed complete exemption from tax with regard to the documentation fee and technical assistance fee. The Revenue declined to accept such claim of Japanese company. The Hon'ble High Court held the view that the agreement between the assessee company and Japanese company showed that the documentation fee, technical assistance fee and royalty could not be treated as being of the same character. The documentation fee and technical assistance fee were separate fees and were not "royalty". Moreover, as per the assessee company the documents were made in Japan and accordingly the receipt of documentation fee was outside India.

On these facts the documentation fees and technical assistance fees were held as not chargeable to Income-tax in India.

(d) In the case of Swadeshi Polytex Ltd. (supra), the assessee company established a polyster staple fibre manufacturing plant in India with collaboration of a German company. To expand the said plant the assessee entered into an agreement with the foreign company for supply of technical know-how for rendering services outside India. There was a clause in agreement enabling the assessee company to allow any other Indian party to use technical know-how subject to condition that licence payment would be shared by assessee with foreign company. The assessee company was bound to pay agreed amount even though it had not used technology transferred to it. The Tribunal held that receipts in the hands of German company would be taxable only under Article 5 of Double Taxation Avoidance Agreement entered into between India and the Government of Germany and since the German company was not having a permanent establishment in India, receipt by German company would be taxable in Germany and not in India.

(e) In the case of Gilbert & Barker Mfg. Co. (supra), the assessee, a foreign company entered into an agreement with an Indian company under which licence was granted to the Indian company to manufacture, sell and service, gasoline pumps. The Indian company was to pay 5% of the sale price of the pumps and parts as per the agreement. The assessee company treated the amount as business income and claimed therefrom research and development expenditure contributable to the licence.

The revenue, however, treated the amount received as income from other sources and disallowed the expenditure claimed. The Hon'ble Bombay High Court held the view that the supply of know-how to others on a licence basis can be regarded as a method of carrying on his business, the principle that is required to be applied is to consider whether, on the facts and circumstances of a given case, the licence granted to make use of know-how is in the nature of applying it in trade. A perusal of the various clauses of the agreement showed that the assessee had not parted with any capital asset. The Hon'ble High Court, therefore, held that income was liable to be taxed as business income and expenses claimed were deductible.

(f) In the case of Rolls Royce Ltd. (supra), the assessee company for the purpose of its business as a manufacturer of motor-cars and aircraft engines, had been engaged in metallurgical research and the discovery and development of engineering techniques and secret processes. As a result it acquired in the course of the years a fund of technical knowledge or "know-how", of which only a comparatively small part was capable of forming the subject-matter of patent rights. For some years the company, as a general rule, used the said know-how only in its own trade, but later on it entered into a number of agreements whereby in consideration of lump sum payments and royalties, it undertook to supply the foreign government or company with technical knowledge, plans, a licence and facilities for the interchange of staff to enable them to manufacture specified types of aircraft engines. The agreements were for periods of from five to ten years with provision for giving full information regarding improvements and the like during that time and with options to renew on terms. The question arose whether in computing the company's profits the lump sum payments received under the agreements should be included or not. The House of Lords held that the sums in question should be so included as being part of the receipt of the company's trade.

(g) In the case of Koyo Seiko Co. Ltd. (supra), the Japanese company entered into a collaboration agreement with Andhra Pradesh Industrial Development Corporation Ltd. for assisting the Andhra Pradesh Companies in the project programme for establishing a bearing factory in India. The agreement provided for technical fee, payment of royalty as well as payment of fee for preparing a project report. The question that arose was whether the technical fee received for providing know-how was taxable in India. The Tribunal found that Japanese company had to supply drawings and data on contracted projects and to share a secret process for a period of agreement of nine years and held the view that the fee received as compensation was a capital receipt and could not be taxed in India. The view so taken by the Tribunal was upheld by the Hon'ble Andhra Pradesh High Court.

6.37 It would be seen from the facts and the ratio of the rulings given in the cases cited on behalf of the assessee and discussed above that the payment made for supply of technical know-how has been held as business profit and not royalty under Double Taxation Avoidance Agreement/ section 9(1)(vi) of the Income-tax Act. In the present case the payment due to be made provided for supply of technical know-how and Basic Process Engineering Documentation for setting up a plant in India and the facts being almost similar and identical the issue involved is fully covered in favour of the assessee company by the aforecited decisions.

6.38 The revenue on the other hand has placed reliance on the decisions in N. V. Philips' case (supra) and Krebs & Co.'s case (supra). In N. V. Philips' case (supra) a non-resident company entered into an agreement with an Indian company under which the assessee agreed to furnish to the Indian company technical information relating to vitamin D and its manufacture, use and sale.

The assessee company agreed to furnish information from time to time in respect of working methods, manufacturing processes including indications, instructions specifications, standards and formulae, methods of analysis; and quality control. The information disclosed was solely for the use of Indian company and was to be considered as having been disclosed in confidence and not to become the property of the Indian company till such time that such information would become public by application and user. The Indian company agreed to pay to the assessee company the consideration of the technical assistance and information supplied, 5 per cent of the net selling price of vitamin D manufactured and sold by the Indian company subject to Indian Income-tax Act. The Assessing Officer treated the amount received as royalty. The CIT (Appeals) held the view that 50 per cent of the payments received by the assessee was in the nature of fees for technical assistance and information and should be taxed as such and the balance 50 per cent should be treated as royalty and taxed in the hands of the assessee company accordingly. The Tribunal upheld the view taken by the CIT (Appeals). The Hon'ble High Court observed that it was significant that a distinction has been made in the agreement between technical assistance and information and the information agreed to be supplied in respect of working method and manufacturing process of the product were exclusive information and knowledge available to the assessee company and not generally disseminated and payment in respect thereof would bear the character of royalty. The Hon'ble High Court thus agreed with the lower authorities that the payment for technical assistance was not royalty.

6.39 I agree with the arguments advanced by the learned counsel of the assessee that this decision also support the case of the assessee as in the present case also the payment made for use of the process for manufacturing of PTA has been shown as royalty in the contract itself whereas the payment made for supply of technical know-how and Basic Process Engineering Documentation in setting up of the plant fall within the ambit of "business profit" and accordingly the Italian company having no permanent establishment in India such payment made being its business profit is not taxable in India.

In the case of CIT v. Krebs & Co. (supra) the assessee, a Swiss company entered into agreement with Indian company for supplying know-how, complete engineering and services for the extension of the existing chlorine and caustic soda plants of the Indian company. The agreement was approved by the Government of India. The assessee company under-took to perform all engineering services necessary for the supply of imported items and for procurement of indigenous items by the Indian company and to integrate all such equipment into the existing plant in order to raise the production capacity of the chlorine and caustic soda plants to a certain limit. The Indian company agreed to pay 4,59,795 Swiss francs as fees for supply of engineering and rendering of services. The assessee company also undertook to provide technical information, drawings, specifications and operating instructions to enable the Indian company to erect, repair and maintain the plant and on its part the Indian company undertook to use such drawings solely for the purpose of erection, repair and maintenance of plant and equipment to be supplied by the assessee company not to use them or pass them on to other parties for use in the construction or operation of any other plant. The assessee company also placed at the disposal of the Indian company one Erection Supervisor and one Chemical Engineer for specified period to supervise, erection and starting of the plant. The fees for supervision, erection and commissioning of the plant was agreed to be paid by the Indian company at 2,04,032 Swiss francs. Thus the total amount of consideration for the agreement was 6,68,827 Swiss francs. The Assessing Officer held that the payment of 4,59,795 Swiss francs for providing technical information, drawings etc. for erection, repair, and maintenance of the plant did not accrue in India and so was not taxable. The Assessing Officer, however, after deducting the remuneration paid to the two engineers from the sum of 2,04,032 Swiss francs, taxed the balance.

The Tribunal held that the entire amount of 2,04,032 Swiss francs was not paid for technical services and there was an element of royalty in the agreement. The Tribunal, therefore, fixed the royalty at 20% of the total consideration which worked out to 40,806 Swiss francs. The Hon'ble High Court observed that an analysis of the provision of section 9(1)(vi) and (vii) would show that what had been made not taxable was only the fees paid for technical services and not royalty. Clause 4 of the agreement made it clear that sum of 2,04,032 Swiss francs would be the cost of supervision of erection and commissioning of the plant. The Hon'ble High Court, therefore, did not approve the Tribunal's action in treating the 20% of the amount as royalty there being no basis therefore. It was, however, held that the assessee company was entitled to get rebate on the actual amount paid by it to its employees for the technical assistance and services and the rest of the amount had to be treated as royalty.

6.40 It would be seen from above that the said fees was for supervision of the erection and commissioning of plant which is held to be treated as royalty whereas the payment made for supply of technical information drawing, specification etc. for erecting, repairing and maintenance of the plant has been held as business profit of the Swiss company not taxable in India.

6.41 In the present case as per the contract Agreement the Italian company is to provide training to the personnel of the assessee company and also to provide technical personnel for supervision, erection and operation of the plant and there is no dispute of taxability of the payment made therefore to the Italian company. The payments in question are, however, for supply of technical know-how and Basic Process Engineering Documentation for designing, construction and operation of the plant and the same is accordingly to be assessed as business profits in the hands of the Italian company as has been done in the aforecited case. The ratio of the decision in my view supports the case of the assessee rather than of the Revenue. Moreover, the said payment made for supervision, erection and commissioning of the plant has been treated as a royalty under section 9(1)(vi) of the Income-tax Act whereas in the present case the provisions of section 9(1)(vi) are not applicable and the terms of DTAA prevail thereon and on this count the facts of the assessee's case are distinguishable from that of the case cited and discussed above and accordingly the ratio of this decision is not fully applicable to the facts of the present case as argued by the learned counsel of the assessee. It would also be evident from the above discussion that the said amount payable to the Italian company for supply of technical know how and Basic Process Engineering Documentation for setting of the plant is business profit in the hands of the recipient and the Italian company having no permanent establishment in India the same is not subject to tax in India as per the provisions of DTAA.

6.42 It has also been argued on behalf of the assessee that tax benefit has been provided in the DTAA as an incentive for technical cooperation between the two countries for mutual benefits. The provisions of the DTAA are, therefore, required to be construed so as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon'ble Supreme Court in the cases of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 and Shaan Finance (P.) Ltd.'s case (supra).

6.43 Having regard to the facts, material on records arid ratio of various decisions cited 1 come to the only irresistable conclusion that the amount payable to the Italian company for supply of technical know-how and Basic Process Engineering Documentation for setting of the plant in India for manufacturing of PTA is the business profit in the hands of Italian company and the Italian company having no permanent establishment in India the same is taxable in Italy and not in India.

The revenue authorities are, therefore, not justified in taxing the said payments in India treating the same as royalty. 1, therefore, concur with the opinion held by the learned Judicial Member on the issue.

6.44 The case may now go back to the regular Bench which heard the appeal for disposal in accordance with the opinion of majority as per provisions of sub-section (4) of the section 255 of the Income-tax Act.

ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT Shri R. K. Gupta, J.M.

1. This appeal was filed by assessee against the order of the CIT(A) dated 11-3-1997 relevant to assessment year 1997-98. The issue involved in this appeal was under section 195(2) of the Income-tax Act, 1961. The assessee made lump sum payment to M/s. Technimont, S.P.A., Italy. The department treated this amount as Royalty and in view of the department the payment made on account of Royalty was taxable and accordingly an order under section 195(2) was passed by which it was held that assessee was liable to pay tax on account of TDS accounting to Rs. 6,10,47,000. The CIT(A) confirmed the order of the Assessing Officer. The matter came before the Tribunal. The case was allotted to Judicial Member who decided the issue in favour of the assessee by holding that the amount paid by assessee is not tantamount to Royalty. However, the ld. Accountant Member dissented by holding that the payment made to M/s. Technimont, SPA Italy was in nature of Royalty. Hence the assessee was liable to deduct the tax. The following question was framed by the Members of the Tribunal -

"Whether, the amount of US $ 250 lakhs and US $ 35 lakhs payable by the assessee to M/s. Technimont of Italy is "Royalty" as defined in the Double Taxation Avoidance Agreement between India and Italy and hence liable to tax in India ?"

This question alongwith the orders passed by the Members of the Tribunal were sent to the Hon'ble President, ITAT, Bombay. The matter was allotted to Shri Nathu Ram, Accountant Member as Third Member who heard the parties in detail and passed his own order. The Third Member was in agreement with the findings of the Judicial Member.

2. The matter was listed for hearing on 1-1-1999 for passing the order as per the majority view.

3. Now after hearing both the parties and considering the order of the Third Member, this Bench finds that the view taken by the Judicial Member is approved by the Third Member. Therefore, in view of the majority decision we allow the appeal of the assessee. The order passed by the respective Members of the Tribunal form part of this order.

4. In the result, the appeal of the assessee is allowed.


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