ORDER
N. Barathvaja Sankar, A.M.
1. These are three appeals filed by the assessee M/s TVS Suzuki Ltd., Chennai, against the order dated 15th January, 1998, of the CIT(A) V, Chennai, for the asst. yrs. 1991-92, 1992-93 and 1994-95. As these three appeals contain common issues, they were heard together and are being disposed of by this common order for the sake of convenience.
2. Briefly stated, the facts of the case are that the assessee M/s TVS Suzuki Ltd. (TSL for short) is a company manufacturing motor cycles since 1984. TSL entered into a collaboration agreement on 13th April, 1989, with M/s AVL Austria (AVL for short). This agreement was for a period of two years. As per the above said collaboration agreement AVL had to render some technical assistance to TSL, for which TSL agreed to pay Austrian Shillings (A.S.) 91,00,000 to AVL as detailed below :
(a) 20 per cent on approval by the A.S. 18,20,000
Government of India
(b) 25 per cent on 30 days after A.S. 22,75,000
first meeting at Austria
(c) 40 per cent within 10 days of A.S. 36,40,000
completion of phase
procurement of prototypes
(d) 15 per cent on completion of A.S. 13,65,000
project
----------------
A.S. 91,00,000
----------------
3. The actual payments were made as detailed below :
Asst. yr. 1991-92 :
Date of Payment A.S. Rs.
12-6-1990 18,20,000 26,87,542
16-1-1991 22,75,000 39,38,712
66,26,254
Asst. yr. 1992-93 : 9-11-1991 36,40,000 87,18,563
----------------
Asst. yr. 1994-95 : 10-2-1994 3,65,000 34,67,100
4. The abovesaid agreement was entered into between TSL and AVL and was approved under the auspices of Technical Development Fund constituted by the IDBI and was approved by the Government of India. The Reserve Bank of India had also accorded sanction to the agreement as ‘Technical Aid Agreement’. At the time of remittance of the fees in four instalments as noted above, the Dy. CIT had issued ‘No Objection Certificate’ for the remittances.
5. Subsequently it was noticed by the ITO, TDS-V, Chennai, that TSL had made the impugned payments to AVL, a non-resident person, without deducting tax under s. 195 of the IT Act, 1961, during the financial years 1990-91, 1991-92 and 1993-94, as already noted elsewhere in this order. Show-cause notice was issued by the ITO, TDS-V, Chennai to TSL, asking it to explain why orders under s. 201 should not be passed, holding the company as an assessee-in-default for non-deduction of tax under s. 195 of the Act from the above-noted payments and why interest under s. 201(1A) of the IT Act, 1961, should not be charged. In reply to the above notice, in addition to the personal appearances of the assessee’s representative, written explanations dated 5th December, 1996, 17th December, 1996, 25th January, 1997 and 7th February, 1997, were submitted to the ITO, TDS-V, Chennai. However, the ITO, after considering the explanation of TSL, for the detailed reasons given in his order, held as follows :
(i) The payments made by TSL to AVL were of the nature of royalty as explained in Article VI of the Double Taxation Avoidance Agreement (DTAA) between India and Austria.
(ii) The payments are liable to Indian IT Act and hence.
(iii) The payments are liable to deduction of tax at source under s. 195 of the IT Act, 1961.
(iv) TSL failed to deduct tax under s. 195 of the Act from the payments made to AVL.
6. Consequently, he held TSL as an assessee in default under s. 201(1) of the IT Act, 1961, for the sums of Rs. 28,39,823, Rs. 37,36,527 and Rs. 80,62,250 respectively for the asst. yrs. 1991-92, 1992-93 and 1994-95. Also interest upto February,1997, under s. 201(1A) in sums of Rs. 26,92,121, Rs. 29,42,515 and Rs. 36,28,012 respectively were levied.
7. Aggrieved, the assessee moved the matter in appeal before the CIT(A)-V, who for the detailed reasons recorded in his order dated 15th January, 1998, dismissed the appeals. Now the assessee has brought the issue before us on second appeal for adjudication.
8. The learned counsel for the assessee Shri Vijayaraghavan vehemently argued that the CIT(A) erred in confirming the decision of the ITO, TDS-V in holding that the assessee was an assessee in default under s. 201(1) and that the assessee-company was liable to pay interest under s. 201(1A) of the Act. His contentions are summarised below.
9. TSL entered into an agreement with AVL on 13th April, 1989 for technical assistance for development of low fuel consumption and low emission level for motor bike produced by TSL, which would be comparable with four-stroke engines. Further, AVL had to provide supporting calculations for Thermo Dynamics.
10. The technical services agreed to be rendered by AVL related to study and improvement fuel of efficiency of the carburetted engine of TSL’s two wheelers. The services to be rendered by AVL were given in Article 2 of the agreement between TSL and AVL dated 13th September, 1989 (p. Nos. 6 to 26 of the paper book I).
11. As per Article 2 of the agreement AVL had to provide design, documents, calculations for modification of the existing carburetted engine of TSL to attain the efficiency of four-stroke engine.
12. AVL should procure parts and components to fit into the revised design.
13. AVL should prepare prototype engines and test the same till they achieve the desired efficiency.
14. AVL should supply 20 sets of component parts to TSL.
15. AVL should provide list of suppliers for component parts.
16. AVL should also train employees of TSL for 3 months (Article 3.2).
17. Under Article 5, TSL had to pay AVL a sum of A.S. 9.1 million. The payment was only for the services rendered by AVL under Art. 2 and under Art. 3.2, i.e., training employees of TSL.
18. On payment of the fees, TSL will have worldwide rights on the drawings, calculation and reports (Article 6.1.1.). AVL should not disclose any of these information (Art. 6.2.2) to any third party except to AVL suppliers that too to the limited extent.
19. These services were rendered outside India by presentation of design parts modifications and supply of drawings and documentation performance of drive ability test, etc. No part of the services were rendered in India.
20. The payments made to AVL was of the nature of technical assistance fees. As per Article VII of the DTAA between India and Austria the fees paid by an Indian concern towards technical services to an Austrian enterprise for services rendered outside India could not be charged to tax in India.
21. As per the agreement entered into between TSL and AVL the latter was obliged only to make ‘modifications of engine parts concerned by design changes and by experimental measures’. There was no emergence of a new design pursuant to experiments by AVL. Only design changes were effected.
22. The price paid was for services in respect of design and calculation work in Thermo Dynamics for the existing two stroke engine as part of power unit as well as experimental modification of parts. AVL was to perform only development work on 100CC engines. AVL was to introduce SDIS (Semi-Direct Injection System) with some modifications only in the sample engines supplied by TSL.
23. The relevant provisions of DTAA between India and Austria are :
(i) Under DTAA between India and Austria the ‘business profits’ (Article III) of an Austrian company, unless it has a permanent establishment in India, is taxable only in Austria.
(ii) Fee, for technical services (Article VII) rendered by an Austrian company is taxable in India only to the extent such services are rendered in India.
(iii) Royalty (Article VI) derived from sources in India is taxable in India
(Pages 1 to 5 of paper book II)
24. Therefore, the amount paid to AVL is not taxable in India under the DTAA :
(i) If it was ‘business profits’ and if it was not attributable to a permanent establishment in India;
(ii) If it was not in the nature of ‘royalty’ derived from sources in India; and
(iii) If it was fees for ‘technical services’ and the services are rendered outside India.
25. Though, as per Article 6.1.1. TSL would have a right to use drawings, calculations and reports as these relate only to modifications of existing design, the payment would not take the character of royalty. The Reserve Bank of India in their permit for remittance of foreign exchange also recognised the agreement as a technical aid fees agreement and referred to the payment as lump sum know-how fees.
26. It may be clear from the above that what had been done by AVL was nothing but providing technical consultancy for improving the efficiency of the existing engine. Clause 6.1.1. of the agreement clearly stipulated that TSL shall have the ‘worldwide rights’ and clause 6.2.2 provided that AVL shall not disclose the results obtained during the design and development work to any third party. The entire services of AVL had been rendered outside India. Hence all the modifications as well as particulars of suppliers, who would be providing the component parts were given to TSL absolutely and they were no longer the properties of AVL.
27. This lead to the irresistible conclusion that AVL had done only consultancy work and whatever were the work and results of such consultancy work, they were passed on to TSL once-for-all. The payment was only for the work done by AVL and for the transfer of technology absolutely to TSL. AVL had not patented any of such drawings. Hence, there was no question of AVL permitting TSL the ‘right to use their patented technical know-how’. Under the circumstances, the payment for services rendered by AVL could only be termed as fees for technical services and could not be considered in the nature of royalty, since it was not payment for the right to use any property of AVL. Further, the payment by TSL was a single lumpsum payment and was not periodical or dependent on production volume, which were the characteristics of royalty.
28. When there was an outright transfer of designs, documents etc. the consideration for such transfer of design, drawings, documents could not be treated as royalty.
29. In the case of ITO vs. Voest Alphine Industries (1998) 67 ITD 219 (Cal), the Calcutta Bench of the Tribunal had considered technical information and services rendered in Austria constituted technical fees and not taxable in India under the DTAA between India and Austria (pp. 9 to 18 of paper book I).
30. Similarly, in the decisions of various High Courts and the Tribunals considering DTAAs with France, United Kingdom and Japan it was held that the payment for transfer of documents and designs constituted fees for technical services under the respective DTAAs. The definition of royalty under these DTAAs are similar to that in the DTAA with Austria. In this connection the following judicial decisions were cited :
(1) DCM Ltd. vs. ITO Taxation 92(4)-16 (Del.) (DTAA with U.K.) pages 19 to 23 of paper book II);
(2) CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal) (DTAA with U.K.) pp. 24 to 28 of paper book II);
(3) Citizen Watch Co. Ltd. vs. IAC (1984) 148 ITR 774 (Kar) (DTAA with Japan) (pp. 29 to 40 of paperbook II);
(4) Graphite Vicarb India Ltd. vs. ITO (1993) 199 ITR 119 (Cal) (AT), (DTAA with France) (pp. 41 to 44 of paper book II);
(5) Union Bros. Industries Inc. A/R Protchem Industries (India) Ltd. [IT Appeal Nos. 989 (Mad) of 1995, 1251 & 1252 (Mad) of 1992 dated 14th September, 1995) Madras B-Bench of Tribunal) (DTAA with Japan) (pp. 45 to 52 of paper book II);
6. Wellman Incandescent India Ltd. vs. Dy. CIT (1997) 57 TTJ (Cal) 562 : (1995) 55 ITD 338 (Cal) (DTAA with Italy) (pp. 53 to 57 of paper book II).
31. The agreement between TSL and AVL was viewed only as technical services by the Government, the Reserve Bank of India, the Austrian company and the Austrian tax authorities and the AO of TSL.
32. Though Indian Income-tax law is blind to equity on grounds of doctrine of estoppel the ITO taking a contrary and different view compared to Dy. CIT (Asst) should be forbidden. It was not correct on the part of the Department to put the assessee-company to hardship on grounds of mere change of opinion. The ITO himself in para 10 had admitted that a portion of the amount paid by the assessee would partake the character of technical services.
33. The CIT(A) had rejected the contention of the assessee-company on the following grounds :
(i) That the mention of ‘worldwide rights’ and ‘transfer of drawings’ would make the payment fall under the definition of royalty under Expln. to s. 9(1)(vi) of the IT Act.
(ii) That the definition of royalty under Article VI of DTAA with Austria corresponds to the definition of royalty under s. 9(1)(vi) of the Act.
(iii) The definition of royalty in Expln. to s. 9(1)(vi) is much wider and more exhaustive than that in DTAA with Austria, which is more restrictive. What might be considered as royalty under s. 9(1)(vi) might not be royalty for the purpose of DTAA.
(iv) The use of the phrase ‘worldwide rights’ in the agreement was only to confirm that TSL would have absolute right over the drawings, calculations, etc.
34. The CIT(A) had cited the decision in the case of Union Carbide Corpn vs. IAC (1994) 50 TTJ (Cal) 535 : (1994) 50 ITD 437 (Cal) : Dy. CIT vs. Sulzer Bros. (1993) 46 ITD 546 (Mad) and Dy. CIT vs. Majestic Auto Ltd. (1994) 51 ITD 313 (Chd) in his order. The first two decisions rely on the definition of royalty under s. 9(1)(vi) of the IT Act, and have, therefore, held payments for drawings as royalty. The issue of royalty as defined under respective DTAAs was not considered in the first two cases before the Tribunal.
35. In the case of Majestic Auto Ltd. (supra), the collaborator, who was also a manufacturer of two wheelers had supplied the technical know-how as well as licence to the Indian company for using them in its manufacture. In these circumstances, the Tribunal had held that the payments were made only for the use of drawings, under which the collaborator had permitted the Indian company to use only the technology owned by the grantor and hence such payment constituted royalty.
36. In the instant case, the Austrian company was only a consultant and not a manufacturer of two wheelers. AVL had only provided ‘technical consultancy’ on the specific problems raised by TSL. The entire ‘technical know-how’ was absolutely to be passed on to TSL. There was no grant of any right to use any property of AVL. Hence, the facts of this case are totally different from the case of Majestic Auto Ltd. (supra).
37. Various High Courts and the CBDT have held clearly that the provisions of DTAA override the provisions of the IT Act. In this connection the learned counsel for the assessee cited the following case laws :
(1) CIT vs. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP);
(2) CIT vs. S. R. M. Firm (1994) 208 ITR 400 (Mad), 418;
(3) Davy Ashmore India Ltd.’s case (supra) and
(4) Arabian Express Line Ltd. of United Kingdom & Ors. vs. Union of India (1995) 212 ITR 31, 35 (Guj).
38. Relying on the above cited decisions it was contended that the definition of royalty as per the DTAA had to be applied. Where there is DTAA between two countries, in order to decide whether a payment is royalty, only the definitions contained in DTAA have to be seen.
39. The Karnataka High Court in the case of Citizen Watch Co. Ltd. vs. IAC (supra) at p. 787 and the Calcutta High Court in the case of CIT vs. Davy Ashmore India Ltd. (supra) at pp. 630 and 631 have clearly held that the definition of royalty under s. 9(1)(vi) will apply only for that section and it cannot be applied for the purposes of determining whether a payment is royalty under DTAA.
40. The Karnataka High Court and the Calcutta High Court in the above two decisions have also clearly held that the royalty is a payment for grant of right to use any property, the ownership of which continues to vest with the grantor. Hence only where ownership is retained and the right to use is granted, the payment of the same will constitute royalty.
To sum up : (1) In these circumstances, in view of the services rendered by AVL as per the agreement and in view of the definition under DTAA and in view of the various decisions of the High Courts and Tribunals interpreting similar words in DTAAs with other countries, the payment to AVL constituted fees for technical services rendered outside India and hence not royalty under DTAA. Therefore, it is not taxable in India.
(2) Further under Article XVII(2) of DTAA with Austria the income derived from the Austrian company from the sources in Austria is taxable only in Austria. The source of income is only where the services are rendered Carborandum Co. vs. CIT (1997) 108 ITR 335 (SC) (pp. 6 to 8 of paper back II) and not the country from where the payment is made. It is only because of this, Indian IT Act has made deeming provisions under ss. 9(1)(vi) and 9(1)(vii). In this view of the matter also the amount is not taxable in India.
(3) As the amount is not taxable, there is no requirement for TSL to deduct tax from the remittance. In fact, it is under these circumstances, the AO permitted the remittance of the amount without deduction of tax.
(4) Without prejudice to the above, when the Department themselves, permitted to remit the payment without deduction of tax, they cannot turn around later and hold that TSL is in default and levy interest under s. 201(1A) of the IT Act, 1961.
41. On the other hand, the learned Departmental Representative strongly supported the orders of the authorities below. His contentions are enumerated below.
42. As per Expln. (2) to s. 9(1)(vii) of the IT Act, 1961, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’. The above definition covers only the fees for managerial, technical or consultancy services. It does not provide for the fees paid for transfer of any calculations, design drawings, any other information or any right to use any patents, etc.
43. The present case in hand is covered by Article VI of the DTAA between India and Austria, as per which, the term ‘royalty’ means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plants, secret processes or formulae, trade marks and other like property or rights.
44. Sec. 9(1)(vi) of the IT Act, 1961 defines royalty on the similar lines, as per which royalty income consisting of lump sum consideration for the transfer outside India of or the imparting of information outside India in respect of any data, documentation, drawings or specifications relating to any patent, invention, model, design, secret formulae, or process or trade mark or similar property are ordinarily chargeable to tax in India. Thus royalty is the payment made by one person for the use of certain exclusive rights belonging to another person.
45. In the present case the Semi Direct Injection System (SDIS), which was developed by AVL, on which AVL had exclusive rights and patents, was introduced in the 100cc motorbike engine owned by TSL. Thus the existing carburetted engine of TVS Suzuki motorbike was converted by AVL into SDIS system (Article 1.6 of the agreement).
46. The payments were made by TSL to AVL not for rendering of technical services alone, but for : (i) the AVL services as per Art. 2, which include design and calculation work in thermodynamics for the engine as part of the power unit as well as experimental modifications of parts; and (ii) the AVL services as per Art. 3, item 3.2, i.e. information, services, etc.
47. As per Article 6.1.1 of the agreement, upon payment of the total sum, TSL shall have worldwide rights to use AVL drawings, etc. to produce and sell the modified engine, as well as to use non-exclusively AVL patents. This provision even survives the expiration of the agreement.
48. Thus the payments made by TSL to AVL were of the nature of royalty as explained in Article VI of the DTAA between India and Austria, which was chargeable to income-tax in India.
49. The decision of the Calcutta High Court in the case of N. V. Philips vs. CIT (1988) 172 ITR 521 (Cal) is more applicable to the case of the assessee. It has been held in this case as follows :
“The nomenclature used by the parties in respect of particular service would not be decisive of the matter but such nomenclature has to be construed on the basis of commercial principles. Technical assistance may be rendered also by supply of information although, such information by way of technical assistance would be information of general nature, but supply of exclusive and specialised information on the basis of which production and manufacture is possible, goes beyond the concept of assistance and falls into the category of right to user of an exclusive property right.”
50. Thus it is very clear that the payments made are more of the nature of royalty than that of ‘fees for technical services’.
51. The argument of TSL that the AO had held that the payments did not attract Indian IT Act and had issued no objection certificate for remittance of the fees without deduction of tax was also not correct. The no objection certificate in question stated that the AO had no objection to M/s TSL remitting the fees to AVL and that the remitter in his capacity as a representative had :
No liabilities outstanding.
52. Made satisfactory arrangements for payment of tax due under the IT Act, 1961 …. in respect of the remittances referred to above.
53. Thus the certificate did not state that the fees were not liable to Indian income-tax, instead it stated that TVS had made necessary arrangements for payment of the tax due under the IT Act.
54. In this connection he referred to Article 5.3 of the agreement between TSL and AVL, which states : “The amount in 5.1 is nett of Indian taxes and any taxes due will be borne by TSL”. Thus the payment of taxes was the responsibility of TSL. Hence, no objection certificates were issued for remittance abroad of the amounts.
55. The argument that TSL was paying royalty to Suzuki, Japan was also not relevant because TSL was paying royalty to Suzuki, Japan for the 100cc machine and other patent rights, etc., whereas the royalty paid to AVL is for the SDIS introduced by it in the 100cc machine, the information, drawings, designs, calculation, etc. provided by it and the worldwide rights acquired by TSL, etc. Thus, the payments made to Suzuki, Japan and AVL, Austria are for two different purposes/rights, etc. acquired.
56. It may be possible that a portion of the amounts paid by TSL to AVL is towards ‘fees for technical services’ rendered by AVL, Austria.
57. But in the absence of the relevant details, the ITO, TDS, could not ascertain as to what portion of the amount could be attributed towards ‘fees for technical services’ and hence he was left with no option but to hold the entire payment as payment of royalty.
58. The learned representative for the assessee had brushed aside before the CIT(A) the decision rendered in Steffen, Robertson & Kirsten Consulting Engineers & Scientists vs. CIT (1997) 95 Taxman 598 (AAR) by saying that in that case there was no double taxation avoidance agreement and the decision was based entirely on the provisions of the IT Act. What really is relevant in that decision is that apart from almost similar facts as obtaining in these appeals, it has been held that, irrespective of the place where the services are rendered by the non-resident, the amounts to be received by him will have to be deemed to accrue or arise in India, since a statutory test for determining the place of accrual of income is the place where the service is utilised. There cannot be two opinions that in the instant case, the results of the agreement between the appellant and the Austrian company were and are being utilised by the former in India. Once this is established and accepted and the nature of the remittance is determined as royalty both by virtue of the almost identical definition of the term used in the Act as well as the DTA agreement, the case of TSL fails.
59. Drawing the attention of the Bench of para Nos. 24 to 30 of the impugned order the learned Departmental Representative contended that when a statutory entity like CBDT itself cannot override the powers of an AO or other IT authority, there is no reason to accept the contention of the assessee that the approval letter dated 26th February, 1990 (issued by the Ministry of Industries, Department of Industrial Development) precluded the ITO, TDS, from exercising his jurisdiction under the IT Act in passing the impugned orders.
60. We have heard the rival submissions and considered the facts and the materials on record including the paper-book submitted by the learned counsel for the assessee, the orders of the lower authorities and the case laws cited by both the parties before us. To resolve the point at issue the following crucial questions are to be answered :
(i) Whether the provisions of DTAA between India and any other country prevail over the provisions of the IT Act, 1961 ?
(ii) In case the DTAA prevails over the Act, whether the impugned payments made by TSL to AVL fall under the definition of ‘royalty’ or ‘technical know-how fees’ as per the DTAA vis-a-vis the collaboration agreement between India and Austria ?
(iii) In case the impugned payments fall under the term ‘technical fees, as per DTAA between India and Austria, whether the Indian company, viz., TSL is liable to deduct tax at source, particularly when AVL, the Austrian company the partner to the collaboration agreement had treated the same as income and offered to Austrian Income-tax in terms of the same DTAA ?
61. Now let us consider the first question as to whether the provisions of DTAA prevail over that of the IT Act, 1961. The very phrase ‘double taxation avoidance agreement’ suggests that there shall not be double taxation of the same assessee by both the countries and there shall not be double avoidance by an assessee. In other words both double taxation and double avoidance are to be prohibited. Sec. 90(1) of the IT Act, 1961 authorises the Central Government to enter into an agreement with the Government of any country outside India :
(a) for granting of relief in respect of income on which income-tax is levied or paid by them under this Act and IT Act in that country, or
(b) for the avoidance of double taxation on the same income, or,
(c) for exchange of information with a view to prevent avoidance or evasion of income-tax payable under the respective laws of the contracting countries, or for investigation of cases of such evasion or avoidance, or,
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country.
62. Sec. 90(2) of the IT Act, 1961 reads as follows :
“Where the Central Government has entered into an agreement with the Government of any country outside India under sub-s. (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.”
63. The agreement, namely DTAA defines certain terms and specifies generally that in case of difference in definitions as given in the laws of the contracting country and the DTAA, the definition as per DTAA would prevail.
64. In the case of Visakhapatnam Port Trust (supra) it was held as follows :
“Though under s. 9(1)(i) of the IT Act, 1961, all income arising, whether directly or indirectly, through or from any ‘business connection’ in India shell be deemed to accrue or arise in India the charging s. 4 as well as the definition of ‘total income’ in section 5 are expressly made subject to the provisions of the Act, which means that they are subject to the provisions of s. 90. By necessary implication it is subject to the terms of the DTAA, if any, entered into by the Government of India with foreign countries. Even assuming that all the profits of a foreign company are to be deemed to accrue to arise in India under s. 9 of the Act, the provisions of the article of the agreement will prevail over s. 9. In effect such profits of a foreign company will not be liable to tax under s. 9 except to the extent allowed by the agreement with the foreign country.”
65. In the case of CIT vs. V. R. S.R.M. Firm (supra) the Madras High Court has observed as follows :
“It is obvious and inevitable that there exists a provision to the contrary in the agreement, there is no scope for applying the law of any one of the respective contracting states to tax the income and the liability to tax has to be worked out in the manner and to the extent permitted or allowed under the terms of the agreement.”
66. In the case of Arabian Express Line Ltd. of United Kingdom & Ors. vs. Union of India‘s case (supra) the Hon’ble Gujarat High Court has observed as follows :
“Sub-s. (2) of s. 90 of the IT Act, 1961, specifically provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-s. (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 the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 333 dated 2nd April, 1982, issued by the CBDT provides that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the IT Act, 1961, and that as per the agreement, the law in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement.”
67. In the case of Davy Ashmore India Ltd. (supra) the Hon’ble Calcutta High Court has held as follows :
“In determining the liability of non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under s. 90 of the IT Act, 1961, the said agreement must prevail over the provisions of the IT Act. The Circular of the CBDT dated 2nd April, 1982, makes this clear. 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 DTAA will have no meaning at all.
Thus, where a DTAA provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the agreement, it is the basic law, i.e. the IT Act, that will govern the taxation of income.”
68. In view of the decisions of the various High Courts discussed above and in the light of s. 90(2) of the IT Act, we are bound to hold that the provisions of DTAA between India and Austria should prevail over the provisions of the IT Acts of the respective countries, as far as the specific provisions in the said agreement.
69. Having answered the first question, let us now move on to answer the second question as to whether impugned payments made by TSL to AVL would fall under the decision of ‘royalty’ or ‘technical fees’ as per the DTAA between India and Austria. The admitted facts are that AVL had no permanent establishment in India and the services were rendered outside India. Also AVL was not a manufacturer of two wheelers and was only a consultant. In the instant case the Austrian company had provided technical consultancy on the specific terms raised by the Indian company, viz., TSL. According to the agreement between the two companies the entire ‘technical know-how’ was absolutely to be passed on to the Indian company, namely, TSL. There was no grant of any right to use any property of AVL. The payment was only for the work done by AVL and for the transfer of technology absolutely to TSL. AVL had not patented any of such drawings. Hence, there was no question of AVL permitting TSL the ‘right to use their patented technical know-how. Under these circumstances the contention of the assessee’s counsel that ‘the payment for the services rendered by AVL could only be termed as fees for technical services and could not be considered in the nature of royalty, since it was not payment for the right to use any property of AVL’ is very much convincing. Further, the payment by TSL was lump sum payment in four instalments and was not periodical or dependent or production volume, which were the characteristics of royalty. There is also force in the argument of the assessee’s counsel that when there was an outright transfer of designs, documents, etc. the consideration for such transfer of design, drawing, documents could not be treated as royalty. We find that the ITO, TDS-V, Chennai, was influenced by the provisions in the IT Act than the provisions of the DTAA and the real activities carried on by the AVL. Also in the decisions of various High Courts and Tribunals, considering the DTAA with Franch, UK and Japan, relied on by the assessee’s counsel, it was held that the payment for transfer of documents and designs constituted fees for technical services under the respective DTAAs. The definition of ‘royalty’ under these DTAAs are similar to that in the DTAA with Austria. The case laws relied on by the assessee’s counsel have already been cited in para 5.21 of this order. It is worthwhile to quote the following findings of the Calcutta Bench of this Tribunal in the case of ITO vs. Voest Alpine Industries (supra), as it arose out of the DTAA with Austria :
“All the provisions of the Act, including that of s. 9 stand overridden by the provisions of the DTAA. The CBDT Circular No. 333, dated 2nd April, 1982 provides that where a specific provision is made in the DTAA that provision will prevail over the general provisions of the Act. In view of this, in the instant case the provision of s. 9 stood overridden by the provisions of DTAA between India and Austria. Therefore, the technical service fees were not taxable in India.
70. Let us also consider the decision of the Patna Bench of this Tribunal in Dy. CIT vs. Tata Yudogawa Ltd. (1999) 68 ITD 47 (Pat). The facts of this case are that the assessee entered into technical collaboration agreement, duly approved by the Government of India and RBI with an Austrian company. In terms of the agreement the assessee was required to remit by way of lump sum technical know-how fees to the foreign company in three instalments. The AO asked the assessee to deduct tax on the payments being made to the said company as they were fees for technical services. On appeal the CIT(A) held that deduction of tax at source was not called for in view of the provisions of Double Taxation Agreement between India and Austria. On the Revenue’s appeal the Tribunal held that ‘in view of Art. 7 of the Double Taxation Agreement between India and Austria the amounts paid to the Austrian company for technical services rendered in Austria are taxable in Austria and not in India. In view of this there was no question of deduction of tax at source from the payments in question. In the instant case the technical services for which the payments were made were rendered in Austria and not in India. Hence the CIT(A) was right in holding that the deduction of tax at source was not called for in this case and the AO should have issued no objection certificate for the remittances of technical know-how fees without deduction of tax at source’. Thus, the Departmental appeal was dismissed. The facts of the case in hand are identical with those in the case considered by the Patna Bench of this Tribunal. In the instant case also the Austrian company (AVL) had no permanent establishment in India and the technical services were all rendered in Austria, i.e., outside India. Also the payment was not in the nature or royalty, as had been already held by us.
71. The following factors would also fortify the claim of assessee in this regard. TSL entered into an agreement with AVL for technical assistance under the auspices of technical development fund constituted by the IDBI and was approved by the Government of India. The Reserve Bank of India had also accorded sanction to the agreement as ‘technical aid agreement’. Also the Dy CIT had issued no objection certificate for the impugned remittances. It is also noticed that TSL by its letter dated 12th January, 1994 addressed to the Dy. CIT, Special Range-IV, Madras has brought to the notice of the Department that there was double taxation avoidance agreement between India and Austria, according to which no tax was deductible at source in respect of the payment made to Austria. In such circumstances the contention of the Revenue that ‘the argument of TSL that the AO has held that the payment did not attract Indian IT Act and had issued no objection certificate for remittance of the fees without deduction of tax at source was also not correct’, cannot stand. Because when an officer’s attention was drawn to the double taxation agreement by the assessee while applying for the exemption certificate and if the officer has issued such a certificate, it is to be construed by implication that the officer has considered all the materials before him before issuing such no objection certificate.
72. Also the assessee has filed a certificate from the auditor of AVL confirming that the technical assistance fee of ATS 91,00,000 was included as technical fees in the tax basis for the calculation of AVL’s income-tax at Austria. AVL had accounted these amounts received as technical fee and not as royalty in its income-tax returns. Once Austria, partner to the DTAA, has considered the receipt as technical fees under the DTAA, India, the remaining partner cannot view it otherwise because both the parties, namely Austria and India are governed by the same DTAA.
73. For all the reasons and discussions stated above we are inclined to treat the impugned payments as technical fees paid to AVL by TSL as per DTAA between India and Austria. Once it has been held as technical fees taxable in Austria, the question of TDS by the Indian company does not arise at all. In this connection we are fortified by the direct decision on applicability of s. 195 for similar payment made by the Tata Yudogawa to an Austrian company of the Patna Bench of this Tribunal in the case of Tata Yudogawa Ltd. (supra)
74. Having held that the impugned payments are not liable for TDS under s. 195, the question of charging of interest under s. 201(1A) does not arise as such.
75. In the result the assessee’s appeals are allowed.