ORDER
Gopal Chowdhury, Judicial Member
ITA Nos. 765 to 767/B/02
1. The assessee has filed these appeals against the order of Commissioner (Appeals)-VI dated 31-1-2002.
2. The assessee is a Public Sector Undertaking. The assessee-company entered into contracts with three non-resident companies by agreement dated 25-4-1991, 12-4-1994 and 20-4-1999. According to the agreements, the non-resident companies were supposed to provide know-how, technical information, technical assistance, training, manufacturing data for which licence was granted to the assessee-company for its production and updating the product in India and abroad. The licensors, i.e., foreign companies who are the sole owners of the technical information or know-how granted to the assessee-company as licensee. Know-how was defined in the agreement as knowledge and technical expertise possessed by licensor. Similarly, the technical information and technical assistance were also defined therein. The different clauses of the agreement has been quoted by the learned Commissioner (Appeals) in the appellate order. By virtue of the agreement, as a consideration of the technology supplied by the foreign parties, the assessee-company paid fees for which tax was duly deducted and paid to the Government of India. Thereafter, the assessee filed an application under Section 195(2) for exemption from deducting tax in India. According to the assessee, the remittance made to the foreign companies would not be income chargeable and hence there was no liability to deduct tax. The claim of the assessee was not accepted by the Income Tax Officer (TDS) and the prayer of the assessee to refund the tax was rejected. Accordingly, the assessee filed the appeal before the Commissioner (Appeals) against the said order. The learned Commissioner (Appeals) considered the various clauses of the agreement entered into by the assessee with foreign parties. It was held by the learned Commissioner (Appeals) that the payment made by the assessee for import of technology was not an outright purchase. According to the provisions of agreement, the licensor shall supply to the licensee know-how and technical information in terms of the agreement. Therefore, payments were made by the assessee to the non-resident companies for use of technical information under the license agreement.
3. The learned Commissioner (Appeals) further considered article 12 of Double Taxation Avoidance Agreement between India and USA and also provisions of Section 9(1)(vi) of the Income Tax Act and held that the consideration paid by the assessee is to be treated as royalty, because it is not a case of outright purchase. Against that order of Commissioner (Appeals), the assessee has filed the present appeals. Since the issues involved in all these appeals are common, these are disposed off by this common order.
4. The learned Counsel appearing on behalf of assessee has filed a paper book containing written submissions, agreements with the foreign parties, DTAA Agreement and also Circulars issued by the Board as well as decisions of various High Courts. It was submitted that the foreign parties entered into agreement with the assessee to supply technology through documents at his country, i.e., at the foreign country. It was submitted that under article 7 of DTAA there is a clause for exemption of such fees to be paid by the assessee in consideration of supply of know-how. The learned Commissioner (Appeals) has wrongly treated the amount of payment as royalty. There is no transfer of ownership of copyright or patent right in the transaction. Our attention was drawn to the article 12 of the DTAA between India and USA where the term royalty has been explained. It was submitted that similarly, under Section 9(1)(vi) of the Income Tax Act also there is no transfer of copyright. Therefore, it cannot be said that the amount paid by the assessee is royalty. Learned counsel for assessee placed reliance on the decision of the Special Bench of ITAT, Delhi Bench in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (Del-Trib) and the decision of ITAT, Bangalore Bench in the case of Samsung Electronics Co. Ltd. v. ITO (2005) 94 ITD 91. Further reliance as placed on the following decisions:
(i) CIT v. Devy Ashmore India Ltd.
(ii) CIT v. Nayveli Lignite Corpn. Ltd.
(iii) Citizen Watch Co. Ltd. v. Inspecting Asstt. CIT
5. On the other hand, learned Departmental Representative supported the orders passed by the authorities below and submitted that the learned Commissioner (Appeals) has rightly relied upon the provisions of article 12 of DTAA where the royalty has been defined. The consideration was paid for use of secret formula or information concerning industrial, commercial or scientific experience. Therefore, it comes within the meaning of royalty under article 12 of Double Taxation Avoidance Agreement. Similarly the payment comes within the meaning of royalty as provided under Section 9(1)(vi) of the Income Tax Act. The learned Departmental Representative supported the orders passed by the learned Commissioner (Appeals) on this matter.
6. We have heard both sides. The learned Commissioner (Appeals) in his order has held that the payment made by the assessee is royalty within the meaning of Section 9(1)(vi) of the Income Tax Act and article 12 of DTAA between India and USA. At page 14 of the order, the meaning of royalty as provided in article 12 has been reproduced by learned Commissioner (Appeals). According to that provision, .payment of any kind received as consideration for the use of or right to use, any copyright of a literary, artistic or scientific work…” is to be treated as royalty. In the present case, there is absolutely no transfer of any copyright in favour of the assessee-company. Therefore, the aforesaid provisions of DTAA is not applicable. In the cases of Motorola Inc. (supra) (Special Bench) and Samsung Electronics Co. Ltd. (supra) (Bangalore Bench), the Tribunal held that the aforesaid provision is applicable only in a case where the copyright is transferred in favour of the assessee. It was held in those cases, that in case of transfer of a copyrighted article or goods in favour of the assessee the aforesaid provision is not applicable. The Tribunal followed the decision of Honble Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh and also the provisions of Constitution of India. In the paper book, the assessee has filed copy of DTAA between India and USA and article 12 of the said agreement has defined the word royalty which is quoted below:
3. The term royalties as used in this article means:
(a) payments of any kind received as consideration for the use of or right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on film tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8.”
We have already held that clause (a) by which payment is made for right to use of any copyright is not applicable in the present case. Under clause (iv) fees for included services means payments of any kinds to any person for rendering technical or consultancy services. Clause (iv) further clarifies that if such services make available technical knowledge, experience, skill, know-how or consist of development and transfer of a technical plan or technical design under Clause 12 of the article royalty and fees for included services are to be paid. The assessing officer as well as the learned Commissioner (Appeals) have considered the provision of royalty only and they have not gone into the provision of fees for included services.
7. In the case of Devy Ashmore India Ltd. (supra) Honble Calcutta High Court followed the decision of Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust and held that the provision of Double Taxation Avoidance Agreement will prevail upon the general provisions of the Income Tax Act. In that case, it has been held by the Honble Calcutta High Court that consideration for transfer of designs and drawings should not be treated as royalty. The Double Taxation Avoidance Agreement between India and UK was considered by the Honble High Court at page 632. There was no provision of know-how or technical knowledge in the said agreement. Although the payment made for transfer of know-how has been discussed at page 633 which is quoted below:
Royalty payments may be in exchange for something in addition to the mere use of the invention. The most common example is that wherein the licensor not only grants the right to use the invention but also undertakes to supply the licensee with technicalknow-howthat is to say, information from his own experience on the most efficient and economical way of working the patent. It is estimated that more than 50% of license contracts include know-howprovisions.
8. The Honble High Court also considered the decision of Karnataka High Court in the case of Citizen Watch Co. Ltd. v. IAC , where it has been held that the term royalty is referable to payments to be made for use of patents and it does not include fee payable for supply of documents and information. In the case of CIT v. Mitsui Engg. Ship Building Co. Ltd. , the Honble Delhi High Court has held as follows:
The contract between the assessee and the manufacturer does not anywhere permitted to exploit. All that the contract provides is an indemnity to the buyer, to protect the buyer against any action by a third party claiming patent, trade mark or other rights in the equipment supplied.
None of the sub-clauses in Explanation 2 under Section 9(1)(vi) would, in the circumstances of this case, be capable of being regarded as covering the design and engineering carried out by the supplier of the machinery abroad. There is no transfer of license of any patent, invention, model or design. The design referred to in the contract is only the design of the equipment required to be manufactured by the supplier abroad and supplied to the purchaser. The information concerning the working of the machine is only incidental to the supply as the machinery was tailor-made for the buyers. Unless the buyer knows the way in which the machinery has been put together, the machinery cannot be maintained in the best possible way and repaired when occasion arises. No licence of any patent is involved. Sub-clause (vi) and also (vii) of Section 9(1) would have no application as the design was only preliminary to the manufacture and integrally connected therewith. The other three sub-clauses also in the circumstances of the case are not attracted.
In view of the aforementioned position, we are of the opinion that no substantial question of law arises for consideration in this appeal.
The appeal stands dismissed.”
9. The Honble Delhi High Court considered the decision of Madras High Court in the case of Nayveli Lignite Corpn. Ltd. (supra), where similar view has been taken. In view of the aforesaid discussion we find that the aforesaid materials and case laws were not examined by the learned Commissioner (Appeals) before taking the decision. Definitely, the aforesaid decisions have a bearing on the issue before us. Accordingly, we set aside the matter and restore it to the file of learned Commissioner (Appeals) for considering the issue afresh in accordance with law.
CO.24/B/03 and CO Nos. 2 to 4/B/04
10. The revenue has filed these cross-objections against the findings recorded by the learned Commissioner (Appeals). In the cross-objections reliance was placed on the definition of know-how as provided in the OECD Commentary and the provisions of Section 9(1)(0) of the Income Tax Act read with article 12 of Double Taxation Avoidance Agreement. While deciding the assessees appeal, we have already discussed this issue and remitted the matter back to learned Commissioner (Appeals). Accordingly, the cross objections are allowed for statistical purposes.
I.T.A. No. 823/B/2001
11. In this appeal, the assessee is aggrieved by the order passed by the learned Commissioner (Appeals), by which interest under Section 244A claimed by the assessee on refund was denied. According to the learned Commissioner (Appeals), the assessee-company is not an assessee with the meaning of Section 244A but deduct or of tax. For disallowing the claim of the assessee, reliance was placed on the Circular No. 769 and Circular No. 790. The learned Counsel appearing on behalf of assessee made the submissions by filing the written submissions.
12. The learned Departmental Representative however supported the orders passed by the authorities below.
13. After hearing both the sides, we find force in the submissions made by the assessee. However, since the main issue has already been remitted back to learned Commissioner (Appeals), we direct the learned Commissioner (Appeals) to consider this issue also in the light of the submission made by the assessee.
14. In the result, all the appeals and the cross-objections are allowed for statistical purposes.
