Mukul Shrawat, J.M.
1. All these three appeals have been filed by the Revenue out of which two are against a consolidated order of CIT(A), dt. 15th March, 1993, and the third one is against an order of CIT(A), dt. 16th Feb., 1994. These appeals have been filed against an order under Section 195 of the IT Act. Since the issue raised in these appeals is common, therefore, consolidated, heard together and hereby decided by this common order. Identical grounds have been raised and the substantial ground is ground No. 1 in all these appeals reproduced below.
On the facts and in the circumstances of the case, the learned CIT(A) has erred in holding that the process design documentation fees paid to the assessee's collaborator company was part and parcel of plant and not royalty.
Facts of the case and order of AO
2. The facts leading to these appeals were that an order under Section 195 was passed by the Dy. CIT dt. 5th Sept., 1990, wherein it was mentioned that the assessee has applied for a "No Objection Certificate" in connection with remittance of 2nd instalment of technical know-how and design engineering fees to its German collaborator, viz. Uhde GmbH, West Germany. The said instalment was in respect of remittable amount of DM 26,66,667. The contention of the assessee before the AO was that the said payment did not fall within the meaning of the term "royalty". It was stated that the payment of design engineering fees was not within the definition of "royalty" as contemplated in Double Taxation Avoidance Treaty (DTAT) with West Germany. The second contention of the assessee was that the said collaborator did not have any "PE" in India. So, the assessee has made the claim that there was no liability to deduct tax under Section 195 of the IT Act, 1961. An unreported decision of Tribunal, Delhi, in the case of DCM Ltd. v. ITO, dt. 11th Oct., 1988, has also been cited. On inquiry in respect of PE, the German collaborator has furnished a certificate wherein it was confirmed that M/s Uhde GmbH had its registered office at Dortmand, West Germany, and has an affiliated company in India. It was also confirmed that M/s Uhde GmbH had no PE in India. On the basis of the said certificate, the AO concluded that the Article H(h) of DTAT was wide enough to include the affiliated company within the meaning of "establishment". He held that on the basis of the dictionary definition of the term "affiliated", it could not be said that the collaborator had no PE in India. He has dismissed this claim of the assessee that M/s Uhde GmbH had no PE in India. The other claim of royalty had also been dismissed on the ground that the definition of "royalty" as per Section 9 of IT Act prevailed, as there was no difference in the definition of royalty as also prescribed under DTAT. With these observations, he has rejected the claim for issuance of "No Objection Certificate" and directed the assessee to deduct the tax at 20 per cent of the remittable amount as prescribed in DTAT with West Germany.
3. The assessee has filed two appeals before the learned CIT(A), one was dt. 7th Feb., 1990, and the other was dt. 5th Oct., 1990. Both these appeals have been decided by the impugned common order now under appeal. In this regard, the learned CIT(A) vide para 3 has clarified that at the time of 1st remittance, the assessee had paid tax of Rs. 53,43,997 on 8th Jan., 1990, and the AO has issued a "No Objection Certificate" on 10th Jan., 1990. The first appeal was against the said deposit of tax as the same was made under protest. Subsequently, at the time of 2nd instalment, the AO has passed the impugned order under Section 195, dt. 5th Sept., 1990, referred to hereinabove, through which the assessee was directed to deduct tax at 20 per cent of the remittable amount. So, the assessee had also filed one more appeal on 5th Oct., 1990, because the bank guarantee was furnished in respect of 2nd remittance for a sum of Rs. 61,40,852. These two appeals have been decided by the first appellate authority vide a consolidated order, dt. 15th March, 1993; the impugned order is now challenged before us by the Revenue. One more order of the learned CIT(A) is for our adjudication which is dt. 16th Feb., 1994, that was in respect of foreign remittance on which tax was deducted at source under Section 195(1) amounting to Rs. 41,70,248 to Uhde GmbH, Germany, for acquiring technical information and process designing documentation. All these three appeals are admittedly in respect of a technical collaboration agreement dt. 21st April, 1989, entered into between the assessee and M/s Uhde, Germany. We have incorporated this short paragraph to clarify the nature of appeals now challenged by the Revenue and also the reason for consolidation of these three appeals.
Observation of CIT(A)
4. The first appellate authority discussed at length the nature of payment, several remittances in question, relevant articles of DTAT and applicable provisions of the IT Act. When the appeal was filed, by that time, only two remittances were in question. The 1st remittance was of DM 26,66,667 against which the assessee had deducted tax at source of Rs. 53,43,997. As against the 2nd remittance, the assessee had given a bank guarantee of Rs. 61,40,852 and at this juncture, it is worth mentioning that later on, the TDS was paid as certified by Bank of India and the amount was duly credited to the Government account. Before the first appellate authority, the details of payment of technical know-how fees and design engineering fees of 1st and 2nd remittances have been furnished and the said details are worth reproduction as follows:
7. The assessee has given details of payment of technical know-how fees, design engineering fees and TDS as under (as far as 1st remittance is concerned):
Technical know-how fees (gross) 1,19,95,000
1st 1/3rd instalment paid 30,98,333
TDS (@) 20% 7,99,667
Equivalent to Rs. (This TDS payment
has not been disputed) 80,12,695
Design engineering fees (gross) 80,00,000
1st 1/3rd instalment paid 26,66,666
TDS @ 20% borne by Finolex Pipes Ltd. 53,33,337
Equivalent to Rs. (This TDS payment
has been disputed) 53,44,018
8. Thereafter, the assessee has given details of payment of technical know-how fees, design engineering fees and TDS as under (2nd remittance)
Technical know-how fees (gross) 1,19,95,000
2nd 1/3rd instalment paid 39,98,333
TDS @ 20% 7,99,667
Equivalent to Rs. (This TDS payment
has not been disputed) 92,07,450
Design engineering fees (gross) 80,00,000
2nd 1/3rd instalment paid 26,66,666
TDS @ 20% borne by Finolex
Pipes Ltd. 53,33,331
Equivalent to Rs. (This TDS payment
has been disputed) 61,40,852
5. Before the learned CIT(A), broadly speaking, four points were under consideration, firstly, whether the issue was appealable under Section 246 of the IT Act, secondly, the assessee was entitled to raise the issue as prescribed under Section 248 of the IT Act, thirdly, whether there was any liability to deduct tax at source under Section 195 of the Act, and lastly, the applicability of relevant articles of Double Taxation Avoidance Agreement (DTAA) between India and West Germany. In respect of applicability of Section 246, the argument was that the appeal lies under Clause (c) of Sub-section (1) of Section 246. In this regard, a portion of Chaturvcdi Pithisaria, 3rd Edn., Vol. 5, p. 4244 was referred to, according to which, where a person under Section 201 was held in default by the Department and the assessee wants to contest the liability, so permitted in respect of tax deduction at source, then such a taxpayer may prefer an appeal under Section 246(1) of the Act. In this respect, reliance was placed on S.M. Modi v. CIT (Bom). The assessee has also relied upon the decision of the Supreme Court in the case of Raza Textile v. 1TO 1973 CTR (SC) 238 : (1973) 87 1TR 539 (SC). It was strongly contested that though at the time of 1st instalment, the TDS was deposited for obtaining 'No Objection Certificate', but the assessee had no liability for deduction of tax at source. In support of this contention, the auditors' certificate has been furnished. As far as remittance in respect of technical know-how fees was concerned, it was specifically mentioned that the tax was to be borne by the said German company. In respect of remittance pertaining to design engineering fees, it was clarified that the tax was alleged to be borne by the assessee i.e. Finolex Pipes Ltd. The next was the applicability of Section 248 of the Act and in this regard, it was placed on record that the assessee has denied its liability for TDS as prescribed either under Section 195 or under Section 200 and the denial of liability is appealable before the CIT(A), and the first appellate authority is authorized under Section 248 to declare the assessee not liable to make such deduction. It was further contended that the assessee had fulfilled one of the conditions of Section 248 of deduction of tax at source and made payment thereof, hence entitled for filing of an appeal. In support of this claim, the assessee has cited Commentary of Sampat Iyengar, 7th Edn., Vol. 5, p. 4391. Next was the main issue of applicability of Section 195 of the Act which was discussed in detail in the impugned order and the main contention of the assessee was that "designing documentation" fees was nothing but in the nature of "plant". It was pleaded that a clearance was obtained from the RBI in respect of the said fees termed as "capital goods" and the Ministry of Finance vide letter No. CG/87(89)/CO/SCS, dt. 27th Nov., 1989, has approved the remittance. So, it was argued that on the payment of said fees the assessee was not required to deduct tax at source. It was clarified that those two assignments, viz. process designing documentation and secondly, technical assistance, both were combined in one agreement. The assessee has denied liability of deduction of tax on the ground that the assessee had purchased plant and the plant cannot be considered to be a royalty. The process designing fees was the property of the assessee and entitled for the usage in its own right as there was no specific period prescribed for the use of such property claimed to be part and parcel of plant. So, it was pleaded that no tax was payable on remittance to foreign collaborator at the time of payment of the said amount. In this regard, a portion of written submissions was reproduced in the impugned order for reference as follows:
The only point in the above appeal is whether the payment made to the German company under Clause 5.2 for the process design documentation as defined in Clause 3.5 of the agreement dt. 16th Aug., 1989, is liable to Indian tax. At the outset, it may be made clear that so far as the payments of technical fees or royalties, payable under other clause of the agreement are concerned, it is not disputed that they are liable to tax in India. However, the price paid for process design documentation is, it is submitted, not liable to Indian tax and hence this appeal. The liability to tax is disputed principally on two grounds.
It will be readily seen that the process design documentation as mentioned in Clause 3.5 is for the design, engineering, construction and commissioning of the plant and machinery which is to be erected as per the German company's know-how. It is inextricably linked with the acquisition of the plant. In fact, it can now hardly be disputed in view of the decision of the Supreme Court in Scientific Engineering House (P) Ltd. v. CIT that the process
design documentation itself constitutes a plant. The price is, therefore, paid for acquisition of a plant and is in no way different from acquisition of any other plant and machinery. It will be seen from the agreement that it was signed in West Germany. It is accepted by the CBDT in para 3(2) r/w para 3(3) of their Circular No. 23, dt. 23rd July, 1969, that sale of plant to an Indian importer will not be liable to Indian tax provided three conditions are satisfied:
(1) Contract to sell is made outside India--It will be seen from p. 44 of the agreement that it was signed in West Germany.
(2) The payment is made outside India-Please refer to Clause 5.3 of the agreement under which payment is to be made outside India.
(3) The delivery must be outside India-Please refer to Clause 3.7 of the agreement under which delivery is to be given outside India.
Thus, all the conditions of the circular are satisfied and, therefore, the price paid for acquisition of plant in the form of process design documentation cannot be made liable to Indian tax.
6. The next was the contention in respect of applicability of DTAT. It was argued that the said payment was neither in the nature of "royalty" nor "technical fees". It was mentioned that both these expressions are defined in DTAA existed between India and West Germany. It was also explained that the provisions of DTAT always override the normal provisions of IT Act. In this regard, CBDT Circular No. 333, dt. 2nd April, 1982, was also cited. It was also mentioned that the definition of "royalty" as given in Article VIII A(3) of DTAT has different connotation and does not apply for the fees for technical services or process design documentation. For clarification, the definition of "royalty" as prescribed in Article VIII A(3) has also been reproduced by CIT(A) as below:
(a) The use of or the right to use any copyright of literary article or scientific work including cinema photographic films;
(b) Right to use films or tapes for radio or television broadcasting;
(c) Right to use any patent, trademark, design model, plan or secret formula or process;
(d) Right to use any commercial, industrial or scientific equipment;
(e) Any information concerning commercial, industrial or scientific equipments, etc.
7. With this background of definition, the assessee has described several terms and clauses of the impugned agreement, according to which, firstly, the technical collaboration was for the purpose of manufacturing of product and secondly, the said technical collaboration was for setting up of a plant itself. So, it was argued that the payment for the process design documentation of the plant was really part and parcel of the plant itself because the plant had to be erected based upon such know-how and design. Before the learned CIT(A), it was emphasised that the assessee had also capitalized the said payment in its books of account and the same was not claimed as revenue expenditure. It was finally pleaded that the AO went wrong in directing the assessee to deduct the tax at source @ 20 per cent on the impugned payment. Reliance placed was on the decision of Tribunal, Delhi Bench, in the case of Swadeshi Polytex Ltd. v. ITO (1991) 38 ITD 328 (Del) and decision of Tribunal, Special Bench, Calcutta, in the case of Graphite Vicarb India Ltd. v. ITO (1992) 43 ITD 28 (Cal)(SB).
7.1 The learned CIT(A) has duly examined Article VIII-A of DTAT between two States and reproduced relevant portion pertaining to the definitions of "royalties" and "fees for technical services". He has also examined Article II of the said agreement wherein the definition of PE is prescribed. He has also examined Article III in respect of taxability of profits of an enterprise. Thereafter, a finding was given that M/s Uhde GmbH of West Germany had a registered office at Dortmund, having no PE in India though they had an affiliated company. He has also given a finding that M/s Uhde had no day-to-day control over the said affiliated company and the management as well as other control was totally independent, being looked after by the said Indian company and had been managed by its own board of directors. He has also given a finding that the documentation of process designing was handed over to the assessee outside India at their office in West Germany. The delivery of process designing documentation has taken place outside India as also been certified by both the parties. The agreement in question was also stated to be signed in West Germany and this fact was held to be accepted by the CBDT as per the CIT(A). The learned CIT(A) has thereafter examined several clauses of the agreement and finally arrived at the conclusion that the terms and conditions of the agreement had been thus bifurcated into two parts. The payments for process designing documentation fees did not fall within the definition of "royalty" as prescribed in DTAT as the same was held to be part and parcel of the plant itself. With these observations it was held that the AO was not justified in requiring the assessee to deduct the tax at 20 per cent of the impugned payment. The order under Section 195 was quashed and the AO was directed to refund the tax already deducted. Being aggrieved, now the Revenue is in appeal before us.
8. From the side of the Revenue, the learned CIT, Departmental Representative, Shri Satya Prakash, and the learned Departmental Representative, Shri Satyakam Mishra, both appeared and argued at length. From the side of the respondent assessee Shri B.K. Khare appeared as well argued at length. Both sides have relied upon several precedents and relevant provisions of the IT Act and the prescribed articles of DTAT. The clauses of the impugned collaboration agreement have also been quoted. At the outset, it is worth mentioning that after hearing both the sides consecutively for two-three days, the hearing was concluded on 4th May, 2005, but thereafter, both the sides have filed their submissions in writing in the registry and pleaded to place those submissions on record with an intention to facilitate the appellate proceedings. Hence, we have directed to exchange the copies of written submissions between both the sides and after providing a final opportunity, the hearing was concluded on 7th June, 2005.
9. From the side of the Revenue, the case was opened by Shri Satyakam Mishra who has firstly narrated the background of the agreement. He has stated that the assessee had entered into an agreement with a non-resident company, viz., Uhde GmbH, West Germany, on 21st April, 1989. The title of the agreement was "agreement for license, process designing and technical assistance for a polyvinyl chloride complex." On the basis of the said contract, the assessee was required to pay to the non-resident an amount termed as "price" as per Article VT of the impugned agreement. The assessee was required to pay this consideration for transfer of technical information pursuant to the Article 3.1 outside India. The rights and licenses granted pursuant to Articles 3.2 and 3.4. The consideration was also in respect of training of personnel as per Article 3.3. The total sum was DM 1,19,95,000 as per the terms of the payment prescribed in Article 5.1.
9.1 In pursuance of this agreement, the assessee has remitted DM 26,66,667 as "design and engineering fees". TDS of Rs. 53,46,997 was stated to be deducted by the assessee and paid on its own to the credit of the Government. Thereafter, the assessee was to remit 2nd instalment of DM 26,66,667 for technical know-how. On this remittance no tax was deducted by the assessee but a bank guarantee equivalent to Indian Rs. 61,40,852 was furnished to the AO. For the remittance of the next instalment, the assessee has moved an application for obtaining a "No Objection Certificate" on 23rd Aug., 1990, before the AO; the AO has examined the matter and thereafter arrived at the conclusion that the definition of royalty under the IT Act and the definition as prescribed under DTAT are pan materia, so the assessee was directed to deduct tax at 20 per cent on such remittance. The learned Departmental Representative has argued that when the issue was carried before the first appellate authority, he proceeded on wrong assumption that the appeals lied under Section 246(1)(c) or under Section 248 of the Act. Shri Mishra has explained that Section 246 permits an assessee to file an appeal if he denies his liability to be assessed. So, he has stressed that once the assessee has suo motu deducted the tax and deposited with the Government, therefore, he has not denied his liability of TDS. Therefore, the said appeal was not admissible before the CIT(A). In respect of the applicability of Section 248, the learned Departmental Representative has argued that in respect of the remittance of 2nd instalments, the assessee has not paid the tax, therefore, not entitled for any relief under Section 248 of the Act.
Reliance was placed on the decision of Calcutta Bench of Tribunal in the case of ITO v. Tata lron & Steel Co. Ltd. (2001) 71 TTJ (Cal) 323. In this manner, the learned Departmental Representative has mentioned that the additional ground is covered by this decision in favour of the Revenue.
9.2 The next plank of his argument was on the merits of the case and in this connection referred to para 3.2 of the impugned agreement, according to which, the "contractor", i.e., Uhde, Germany, has authorized the owner, i.e., the assessee, the non-exclusive right, including non exclusive licence under the patent rights to use the technical information and to operate the process in plant. In this clause it is mentioned that the contractor undertook not to assert any of its proprietary rights, including the patent rights but excluding trade names, to prevent the manufacture of product in the plant and the sale of product by owner to any country of the world except in the Federal Republic of Germany. So, the argument of the learned Departmental Representative that the interpretation is required whether the payments made were in the nature of royalty or fees for technical services. The learned Departmental Representative has also drawn our attention on Article 4 of the impugned agreement dealing with the price or consideration for transfer of technical information. According to this article, M/s Uhde was to prepare and supply process design documentation for commissioning/construction and maintenance of plants. The said preparations were to be performed outside India and such technical information and design documentation was to be passed on to the assessee in Germany. However, it is not in dispute that the aforesaid design and documentation were subject to use in India. With this background, the learned Departmental Representative has referred to Section 5(2) of the IT Act and argued that the total income of any previous year of a person who is a non-resident includes all the income from whatever sources derived which is received or deemed to be received in India, thus taxable under the IT Act. The learned Departmental Representative has further argued that Section 9 of the Act defines income deemed to accrue or arise in India and Section 9(1)(vi) and Section 9(1)(vii) deals with taxation of royalty and fees for technical services received by a non-resident and this section makes such sums liable to, tax in India by deeming them to accrue or arise in India. So, the payments made by the assessee come within the ambit of these two sub-sections though might have been paid outside India and such payments made outside India were simply a procedure adopted having no consideration on the taxability in India. In support of this argument, reliance was placed on the following decisions:
(1) Hemalatha Gargya v. CIT ;
(2.) Gursahai Saigal v. CIT ;
(3) ITO v. T.S. Devinatha Nadar and Ors. (1968) 68 ITR 252 (SC);
(5) Allied Motors (P) Ltd. v. CTT ;
(6) Kedamath Jute Mfg. Co. Ltd. v. CIT .
9.3 The next plank of his argument was on the subject of "royalty". In this connection, he has referred to few clauses of agreement and vehemently stated that the information provided was fully covered under Section 9(1)(vi) of the Act, according to which, the German company imparted the information concerning the work of a patent, invention, model, design, formula, etc. In lieu of supply and transfer of royalty, a lump sum consideration was settled between the parties and as per the terms of the agreement, the assessee was under obligation to make the payment in instalments. He has emphasized that the whole of the document, i.e., the agreement in question has to be read as a whole to arrive at the correct determination of the nature of service provided by M/s Uhde. He has mentioned that otherwise also the rules of statute insofar as the document is concerned is that it should be read as a whole unless some part of which is illegal. For this proposition, reliance was placed on the decision of Madras High Court in the case of CIT v. Neyvcli Lignite Corporation Ltd. . Further
advancing his arguments, it was stated that fee for technical services is defined in Section 9(1)(vii) (which) means any consideration for rendering technical or managerial or consultancy services but it does not include consideration for any construction, assembly, mining, etc., deemed to be income accrues or arises in India and chargeable under the statute. After narrating the provisions of the Act, the learned Departmental Representative has referred to DTAA between Federal Republic of Germany and Republic of India. In this connection, Article VIII-A was referred, wherein the term "royalty" has been defined. As per this article royalty and fees for technical services arising in a Contracting State and paid to a resident of other Contracting State may be taxed in that other State. So, such royalty, etc. to be taxed in the Contracting State in which they arise and to be taxed according to the laws of that State. Relying upon Article VIII-A of DTAT, the learned Departmental Representative has stressed that the royalty is subject to tax in India in the hands of M/s Uhde, Germany. In support he has cited Bangalore Bench decision in the case of AEG Aktiengesselschaft v. IAC (1993) 47 TTJ (Bang) 648 : (1994) 48 ITD 359 (Bang) and another decision of Delhi Bench in the case of Asstt. CTT v. Hewlett Packard Ltd. (2002) 75 TTJ (Del) 786.
9.4 The learned Departmental Representative has concluded that, firstly, the appeal should not have been entertained by the learned CIT(A) in view of Section 248 of the Act because the assessee has not paid the TDS and simply made a provision by furnishing a bank guarantee. Furnishing of a bank guarantee did not tantamount to payment to Government department and in support, he has cited the decision of Ahmedabad Bench in the case of Asstt. CIT v. Mugat Dyeing & Printing Mills (2003) 77 TTJ (Ahd)(TM) 696 : (2003) 87 ITD 215 (Ahd)(TM). In concluding remarks, the learned Departmental Representative has mentioned that at the time when the first instalment was paid the assessee has suo motu deducted the tax and paid the same. So, it was very well aware about its liability under the IT Act though subsequently, changed its stand and challenged the applicability of Section 195 of the Act. There is no ambiguity in Section 195(2) of the Act and a person is responsible to deduct tax at source on payment of any sum to a non-resident. In the opinion of the learned Departmental Representative, the first appellate authority has exceeded his jurisdiction, firstly, by entertaining the appeal and secondly, by directing the AO to refund the amount of TDS. Alternatively, the learned Departmental Representative has also argued that if at all a right of appeal was there, then the same was the right of the said German company and not the assessee. For this proposition he has cited the decision of the Supreme Court in the case of Transmission Corporation of A.P. Ltd. and Anr. v. CIT . He has
argued that right of appeal is of a person who denies liability of the tax. In this case, the said foreign company has a right to challenge the chargeability of tax and can file an appeal under Section 246(1)(c) but not the assessee because he was not affected in any manner by merely deduction of tax. For this proposition, he has cited the decision of the Calcutta Bench of Tribunal in the case of ITO v. Tata Iron & Steel Co. Ltd. (supra) and the decision of the Supreme Court in the case of Raza Textiles Ltd. v. ITO (supra).
9.5 Once the first appellate authority had no jurisdiction over the issue, therefore, in turn, the Hon'ble Tribunal also had no jurisdiction to decide this appeal, the learned Departmental Representative made a concluding remark.
10. From the side of the respondent-assessee, Mr. Khare has opened his arguments by referring to charging Section 4 of the Act. Sub-section 2 of this section states that in respect of income chargeable under Sub-section (1) income-tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provisions of this Act. According to him, first of all this is to be ascertained whether tax at source was at all deductible under any provisions of this Act. In respect of this argument, he has referred to Section 195(1) of the Act and argued that the responsibility of any person is fixed while making the payment to a non-resident if the said sum is chargeable under the provisions of this Act. First of all it is to be determined whether the said sum is chargeable in the hands of the said non-resident under the Act and thereupon at the time of credit or payment the payee is responsible to deduct income-tax thereon at the rates in force. In his opinion, to facilitate the tax deductor, Sub-section (2) to Section 195 has been incorporated, according to which where a person responsible for paying any such sum chargeable under this Act may make an application to the AO to determine the chargeability as also the TDS thereon. These fundamental rules have to be applied in each and every such type of cases, he has pleaded.
10.1 Coming to the first plank of Revenue's argument about the maintainability of appeal, Mr. Khare has mentioned that the right of appeal of an aggrieved taxpayer should not be denied. Section 248 is meant for this purpose, according to which, if any person is aggrieved by an order under Section 195 and denies his liability to make such deduction, then has a right to appeal before the CIT(A). In the present case, the learned CIT(A) has rightly exercised his jurisdiction and declared the assessee not liable for any deduction of tax at source. The other provision of the IT Act is Section 246 which predominantly provides a right of appeal against an order where the assessee denies his liability. The cumulative effect of both these sections leaves no doubt that a resident of India has a right of appeal if aggrieved by any order of Revenue authority, Mr. Khare has submitted. Reacting on the comment of the learned Departmental Representative he has mentioned that the TDS on first instalment was paid under protest, hence mere deduction of tax should not construe that the assessee has accepted his liability. Mr. Khare has also commented that otherwise also, the deposit of tax is one of the pre-condition of Section 248 as also admitted by the learned Departmental Representative, therefore, the Revenue should not argue both ways i.e. on one hand non-deposit of tax denies the right of appeal and on the other hand, payment of tax gives an indication of acceptance of liability. According to him, even otherwise, the right laid down in the case of TISCO (supra), as cited by the learned Departmental Representative is also in favour of the assessee because the Hon'ble Calcutta Bench has held that an appeal can be filed under Section 248 and the assessee is at liberty to pay tax to get the right of appeal before the C1T(A). The Bench has gone to this extent that a belated appeal should also be entertained by condonation of delay if the condition precedent in Section 248 of deposit of tax is satisfied by the taxpayer.
10.2 Coming on the merits of the case, the learned Authorised Representative has mentioned that an agreement was made between the assessee and Uhde, GmbH, Federal Republic of Germany, for licence, process, design and technical assistance for polyvinyl chloride complex. This agreement was signed on 21st April, 1989, containing preamble and as many as 14 articles. The assessee is termed as "owner" in this agreement and the German company was termed as "contractor". There was a mention of Hoechst AG as "licensor" who has developed process and was in possession of technical information including know-how, process, design and information for related equipment and technology concerning manufacture of EDC, VCM, PVC. The assessee was establishing a polyvinyl chloride complex at Jaigad in the State of Maharashtra. This agreement has clearly stated that the "contractor" was a fully owned subsidiary company of "licensor", hence authorized to licence on behalf of the licensor, the technology for manufacture of PVC, etc. To remove any doubt, the corresponding letter from the licensor has also been enclosed along with this agreement. In respect of technical information and process design, documentation of the preamble to the impugned agreement describes as follows:
Owner desires to receive from contractor a licence, technical information, process design documentation and technical assistance by delegating, expatriate personnel and by training owner's personnel, necessary to design, engineer, construct, erect, operate and maintain the abovementioned plants and contractor is authorized by licensor and willing to grant and supply to owner such licence, process, design documentation and technical assistance, and to allow the use of such technology by owner in said plants under the terms and conditions hereinafter setforth.
10.3 Article 1 of this agreement defines "patent rights", "process design documentation" and "technical information", etc. Article 2 of this agreement provides scope of the complex. The important article is Article 3 which defines contractor's obligations. This article states that the contractor agreed to make available the technical information to the owner i.e. the assessee, outside India. The owner was held responsible to make the agreed payments. Mr. Khare has mentioned that para 3.2 of the Article 3 has also been referred by learned Departmental Representative and there is no doubt about this fact that the technical information was provided by the contractor and the contractor had obtatned the rights which were transferred to the assessee if used in India. However, there was a restriction that in case the owner intended to export the product so produced in the said plant to any customer in Federal Republic of Germany or to the countries of European Common Market, then such exports should be made through the licensor. Next, the contractor i.e. the German company was under obligation to provide in India qualified and experienced expatriates and technical persons as required having full knowledge of process of construction and erecting of plant. The contractor was also under obligation to provide technical personnel having knowledge of manufacture of the product, safety check of plant, commissioning of plant and its initial operation such as guarantee test run. Article 4 provides "price" of the agreement which was to be transferred as consideration for obtaining technical information and process design fees. Mr. Khare has mentioned that Article 4 has two main clauses as far as the deduction of tax is concerned i.e. Clauses 4.3 and Clause 4.4. The normal clause provides tax deduction @ 20 per cent in respect of technical information as defined in Articles 3, 3.1 and 3.2. However, the latter clause, i.e., 4.4 provides that tax if any, was to be borne directly by the owner in such a way that the contractor shall receive the agreed amounts in the Federal Republic of Germany net of taxes, customs, cess, etc., in respect of payments made in consideration of supply of process, design documentation. The assessee had adhered to these clauses and acted upon accordingly. Due to this reason at the time of payment of first instalment pertaining to technical information, the tax was deducted. The dispute is only with respect of the payment of instalment towards process design documentation. As far as this documentation is concerned, Article 3.5 states that the contractor shall prepare the process design documentation outside India and supply to the owner i.e. the assessee for designing, engineering, construction, commission, operation and maintenance of the plant. At this juncture, Mr. Khare has stressed upon the point that the process design documentation was nothing but part and parcel of the plant and the learned Departmental Representative has wrongly argued that such information was in the nature of "royalty". In support of this argument, he has further mentioned some of the clauses of Article 6 through which the responsibility was fixed upon the German company i.e. contractor to commission the plant, perform the test run and only on completion of guarantee-test-run it shall prepare a certificate of providing commissioning of plant and present the certificate to the owner i.e. the assessee. The relevant clause referred in the agreement is 6.47. The purpose of mentioning this clause of the agreement was that the entire collection of information and documentation was inextricably linked with the commissioning of plant. Article 10 of this agreement has a clause of secrecy in respect of technical assistance provided by the said company. One more thing was clarified by the learned Authorised Representative that the assessee was under obligation to return to contractor the "technical information" upon the termination of the agreement, but the same was not in respect of "process design documentation". To support this argument, he has heavily relied upon the decision of the Calcutta High Court in the case of CIT v. Davy Ashmore India Ltd. .
10.4 In support of his argument that the nature of payment was not "royalty", the learned Authorised Representative has referred to unreported decision of Tribunal, Pune Bench, viz., ITO v. Be Delft Electronics in ITA Nos. 963 & 964/Pune/1994, dt. 23rd April, 2003, and Dy CIT v. Toshniwal Instruments (Bombay) Ltd. in ITA No. 337/Mum/2002 (SMC), dt. 19th Sept., 2003. Mr. Khare has strongly argued that since the supply of drawings and design was for the purpose of setting up of the plant and the information was an outright sale in the hands of the German company and outright purchase in the hands of the assessee company, therefore, the consideration paid was a commercial profit as far as the German company is concerned, hence, out of the ambit of the term "payment for royalty". In support of this argument, he has relied upon decision of Tribunal, Delhi Bench, in the case of Munjal Showa Ltd v. ITO (2001) 117 Taxman 185 (Del)(Mag). He has also cited one more decision of Tribunal, Delhi Bench, in the case of Swadeshi Polytex Ltd. v. ITO (supra), wherein the DTAT was also in respect of Federal Republic of Germany and the issue was in respect of the assessee having business connection in India whether constituted PE or not. Though in that appeal, the technology services were not immediately used by the Indian company even then it was held by the Coordinate Bench that since the payment was for out-right sale and not for mere user of the technology, therefore, the agreement would not militate against the assessee. He has also cited few instances where the collaboration agreement admittedly having two components-one, lump sum consideration for transfer of technical know-how and the other, independent regular payment on percentage basis for the right to use the know-how as a royalty. The Courts have taken into account such bifurcation and held that the payment in instalment was nothing but profit within the meaning of Article HI of DTAA subject to tax in India as royalty only if the said foreign company had a PE in India, otherwise not. Reliance was placed on Calcutta Bench of Tribunal in the case of Graphite Vicarb India Ltd. v. ITO (supra). Further, extending his argument, he has mentioned that an interesting issue came up before Tribunal, Bench of Delhi in the case of DCM Ltd. v. ITO (1989) 29 LTD 123 (Del), wherein the company had entered into an agreement with a foreign enterprise for transfer of comprehensive technical information, know-how along with the supply of equipment. The assessee in that case was entitled to sub-licence its right and in turn agreed to pay certain amount in instalments to the said foreign enterprise. Even then, though the payment was made in instalments in respect of right of use of know-how but a view is taken that since the foreign party had no PE in India, hence such payment was not in the nature of royalty to be taxed in India.
10.5 Next coming to his another argument that the payment was in the nature of acquisition of "plant", the learned Authorised Representative has relied upon decision of the Supreme Court in the case of Scientific Engineering House (P) Ltd. v. CIT (supra). In that case, the Hon'ble Court has held that the documents though could not by themselves perform any mechanical operation or process, that cannot militate against there being a plant, since they were in a sense, the basic tools of the assessee's trade having a fairly enduring utility. So, the Hon'ble Court has held that the assessee was entitled for depreciation on such cost of documents.
10.6 On the question of royalty, Mr. Khare mentioned that this question was subject to controversy before Tribunal, Jaipur Bench, wherein in the case of Modern Threads (India) Ltd. v. Dy. CIT , Hon'ble JM has held that the payment was not in the nature of royalty. However, the AM held otherwise. So, the matter was referred to the Third Member, who has consented with the JM and held that the payment was not in the nature of royalty. In that case, an elaborate discussion was made and after considering the several precedents as available at the time as well as after considering the word "royalty" as described in Black's Law Dictionary, a conscious view was taken that even though the payment was made in lump sum but the assessee had become the owner of such rights, hence the supply of technical know-how was a business profit and not a royalty either under the articles of DTAA or as prescribed under Section 9(1)(vi) of the IT Act. Finally, he has cited a decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Hindustan Shipyard Ltd. 1975 CTR (AP) 97 : (1977) 109 LTR 158 (AP) and compared that in the case of the assessee the contract of sale was that of process design documentation which was lent to the sale of engines, etc. Further, the consideration for technical supervision was separately stipulated in the agreement. Hence, the said foreign company had no business connection as far as this agreement was concerned. The process design documentation is defined distinctly in the agreement having different character altogether from the technical information provided and the clause of secrecy and confidentiality was only in respect of technical information and not in respect of process design documentation. The assessee was entitled for use of technical information, improvement, patent rights and process in the plant even after the expiry of the agreement without making any additional payment, and upon termination of the agreement owing to the breach of the terms of agreement only, the assessee was made responsible to return back only the technical information and not the process design documentation. Supporting the view taken by the learned CIT(A), the learned Authorised Representative has concluded that necessary aspects have rightly been taken into account and duly considered by the learned CIT(A) and thereafter carefully arrived at the conclusion that there was no justification for requiring the assessee to deduct the tax at source @ 20 per cent hence prayed for confirmation of the same.
Rejoinder by Revenue
11. In rejoinder, the learned CIT Departmental Representative, Mr. Satya Prakash, has briefly mentioned that the place of payment or handing over of documentation is of no relevance as far as the treaty is concerned, hence in this regard, the argument of the learned Authorised Representative has no consequence or force. He has cited the decision of Bombay High Court in the case of Goa Carbon Ltd. v. V.M. Muthuramalingam and Anr. . The learned
CIT-Departmental Representative has also argued that the issue of royalty is always a subject of controversy and if, on one hand, the learned Authorised Representative has cited so many decisions wherein it was held that such types of payments were not in the nature of royalty but, on the other hand, there are several decisions in favour of Revenue where the Hon'ble Courts have held that the payments made for acquiring patent rights and know-how are in the nature of royalty. In support of this proposition case law cited are Leonhardt Andra Und Partner, GmbH v. CIT and another decision of Bombay High Court in the case of Goa Carbon Ltd. v. V.M. Muthuramalingam and Anr. (supra). He has further elaborated the third argument that the amount was meant for providing specialized knowledge of manufacturing of a particular commodity so the distinction is between technical assistance; then the disbursement of such amount is nothing but for acquiring royalty, as held in the case of N.V. Philips Glocilampenf Abricken Eindhoven v. CIT . In a situation when a
composite payment is being made through an agreement for supply of know-how as well as for supplying of information for setting up of a plant, it was held that 50 per cent of the amount to be in the nature of royalty and balance 50 per cent to be in the nature of fees for technical services. This percentage has duly been approved by Hon'ble Calcutta High Court in the case of N.V. Philips Glocilampenf Abricken . Again, heavily relying upon the Delhi Bench decision of Tribunal in the case of Asstt. CIT v. Hewlett Packard Ltd. (2002) 75 TTJ (Del) 786, the learned Departmental Representative has stressed that in that case as well, the agreement in question was between India and Germany wherein there was a transfer of technology and know-how vis-a-vis user of technology. The German company had entered into an agreement of technical collaboration with an Indian company for rendering technical assistance against a lump sum consideration. There were certain stringent clauses in the agreement as in the present case, placing restrictions, limitation, controls, checks over user of technical know-how. So, it was held that there was no transfer of technology but merely a case of transfer of user of technology. He has concluded that the Hon'ble Delhi Bench has thus rightly held that the know-how fees could not be said to be business profits in the hands of foreign company and thus the requirement of having a PE in India for it to be taxable in India was held not necessary and those receipts, as per the said decision, fell within the definition of "royalty" and held as exigible to tax in India under Article VIII-A of DTAA. So, he has concluded that since the DTAA between India and Germany was duly considered along with Section 9 of the IT Act by the Hon'ble Courts, therefore, this decision has to be followed by reversing the finding of the learned CIT(A).
12. We have conscientiously heard at length the arguments of both the sides. We have thoroughly perused the impugned orders of the authorities below in the light of plethora of judgments cited from both sides. Though the issue in hand is not a new one as we have seen after examining several case law that the same has already been dealt exhaustively by several Co-ordinate Benches as well as by Hon'ble High Courts, still we consider it necessary to deal with all the points and arguments raised by both the sides so as to arrive at the right conclusion. Since, the arguments were carried for two days, therefore, we cannot afford to be brief in deciding these appeals. First of all, we can consider the nature of agreement now in question through which the assessee, M/s Uhde, has entered into a collaboration to appraise ourselves the correct factual implications and thereafter we will proceed to discuss the legal aspects of the matter. For latter, we will examine the charging section, Sections 9, 90, 195 of the IT Act vis-a-vis Sections 246 and 248 in the light of applicable articles of German treaty.
13. The agreement was incorporated between Finolex Pipes Ltd. and Udhe GmbH, Federal Republic of Germany, dt. 21st April, 1989. This agreement was for licence, process design and technical assistance for a polyvinyl chloride complex. The assessee has intended to establish a plant at Jaigad for manufacture of PVC, etc. as already described by the learned Authorised Representative. The terminology used in this agreement defined the assessee as "owner" and the M/s Uhde as "contractor". Since M/s Uhde is a subsidiary of Hoechst AG, therefore, it was termed as "licensor". We are mainly concerned with Article 3 through which contractor's obligations were defined. Article 3.2 was in respect of technical information and Article 3.5 was for supply to owner, i.e., the assessee the process design documentation. This distinction was taken into account when the "price" was fixed as per Article 4 of the impugned agreement. Clause 4.1.1 has fixed the consideration for the transfer of technical information. However, Clause 4.1.2 has fixed the consideration in respect of process design documentation. In the like manner, the obligation of tax liability has also been separately fixed in respect of both these two components. Clause 4.3 provides payment in respect of technical information was subject to tax deduction at source in India on behalf of the "contractor" @ 20 per cent. According to DTAA between India and Germany, "owner" was responsible to provide the contractor the tax receipts. So there is no dispute as far as this clause is concerned. Next is the Clause 4.4 in respect of payment pertaining to process design documentation which was not inclusive of any tax, cess, duty, etc. This clause has provided that if any tax liability may arise the same shall be borne and paid additionally by the owner to the tax authorities in such a way that the contractor shall receive the agreed amounts in Federal Republic of Germany net of taxes, cess and duty, etc. This clause is in dispute because in respect of consideration pertaining to process design documentation, the order under Section 195 was passed by the AO through which the assessee was held responsible to deduct tax at source @ 20 per cent on the remittable amounts. The learned CIT(A) has also precisely made a distinction of these two components by reproducing the details of instalments, incorporated (supra). The terms of payment have also been defined in Article 5 of this agreement through which the total amount of DM 1,99,95,000 was required to be paid in three instalments of DM 66,65,000. The assessee was under obligation to open irrevocable letter of credit and payment was required to be made not later than 45 days prior to the date of departure of each delegation sufficient in advance to cover the cost. On the other hand, the contractor was responsible for commissioning, guarantee-test and completion of plant. Articles 6 and 7 have imposed several obligations on the said German company. In this regard, the learned Authorised Representative has explained in detail the several clauses to appraise us about the nature of agreement as also the nature of consideration. The assessee has acted upon accordingly and obtained "No Objection Certificate" at the time of payment of first instalment. This is an admitted position as discussed above. The dispute has arisen when the assessee had applied for another "No Objection Certificate" at the time of payment of second instalment. This was denied by an order under Section 195, dt. 5th Sept., 1990, and the assessee was directed to deduct tax @ 20 per cent. This was challenged before the learned CIT(A). The view taken in favour of the assessee by the learned CIT(A) has already been discussed in detail in paras 4, 5, 6 and 7 supra. So, we have to decide the issue within this background as raised in the grounds of appeal whether the process design documentation fees paid by the assessee to the said collaborator was part and parcel of "plant" or the consideration was in the nature of royalty.
14. The term "royalty": is defined in Section 9(1)(vi), Expln. (2) of the Act. It states that for the purposes of this clause, "royalty" means consideration including lump sum consideration for transfer of all or any rights in respect of patent, invention, model, design, secret formula, imparting of any information concerning the working of, or the use of, a patent invention, use of any patent and right to use any industrial or commercial or scientific equipment. The object of insertion of this section appears to be that due to the advancement of civilization and inter-communication and co-operation between different countries, royalty payment under collaboration agreements have greatly increased. Surprisingly, earlier there was no specific provision for grouping any such payments in the net of taxes in India. So, the Finance Act, 1976, has inserted Clause (vi) in Section 9(1) defining the expression "royalty" and also prescribing circumstances wherein such royalty income shall be deemed to accrue or arise in India. In this regard, CBDT has also issued a Circular No. 202, dt. 5th July, 1976, explaining the effect and scope of this section. A non-resident taxpayer is chargeable to tax in India in respect of income by way of royalty which is received in India and it was also mentioned that any lump sum payment made for the supply of know-how is not chargeable to tax where such know-how is supplied from abroad and the payment thereof made outside India even though the know-how is used in India. So, a clarification was made by this circular and the said section clearly specified the circumstances under which the royalty income was subject to tax. The definition appears to be wide enough to cover various kinds of royalties. But, one has to examine Section 9 as a whole because first limb of Clause (1) of Section 9 is a mere general provision. But, Clause (vi) of Section 9(1) deals with specific type of income viz., royalty. While we were hearing the arguments of learned Departmental Representative it was noticed that sometimes Section 9(1)(i) was stressed upon and pleaded as applicable in the present case and sometimes Section 9(1)(vi) was relied upon. In this regard, it is worth mentioning that income by way of royalty is a species or one of the categories of a larger class mentioned in the first limb of Clause (i) and when one comes across the question of royalty, one has to look only at Clause (vi) and not to the general provisions of the section. Similarly, the income by way of fees for technical services, which is covered by Clause (vii) is a more general category as compared to the royalty. On the principles that the particular excludes the general, so the Clause (vii) naturally cannot be applied to royalty income which is covered only under Clause (vi). The word "royalty" has also been described in Black's Law Dictionary 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.
We have also noticed that the term "royalty" : is described in K.J. Iyer's Judicial Dictionary according to which it has several meanings as follows:
(a) Percentage 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.
So, this definition indicates that the royalty payment is restrictively linked to the production, thereupon profits earned through use of process or the formula or a patent, etc. Contrary to this, in the present appeal, the process design documentation has a direct nexus with the production and commissioning of the plant. Due to this reason, the main thrust of the argument of Mr. Khare is that the lump sum consideration was not at all the royalty but part and parcel of "plant".
15. We have also laid hands on the extracts from the Model Tax Convention of India, published by OECD committee on fiscal affairs known as Organization for Economic Co-operation and Development, Paris; a condensed version published in April, 2000. Relevant article of this convention is Article 12 concerning the taxation of royalties. As per preliminary remarks, "1. In principle, royalties in respect of licences to use patents and similar property and similar payments are income to the recipient from a letting. The letting may be granted in connection with an enterprise (e.g. the use of literary copyright granted by a publisher or the use of a patent granted by the inventor) or quite independently of any activity of the grantor (e.g. use of a patent granted by the inventor's heirs). 2. Certain countries do not allow royalties paid to be deducted for the purposes of the payer's tax unless the recipient also resides in the same State or is taxable in that State. Otherwise, they forbid the deduction. The question whether the deduction should also be allowed in cases where the royalties are paid by a resident of a Contracting State to a resident of the other State, is dealt with in para 4 of Article 24." Whilst the definition of term "royalties" in Model Convention, 1977, included payments "for the use of or the right to use industrial, commercial, or scientific equipment", the reference to these payments was subsequently deleted from the definition. Given nature of income from the leasing of industrial, commercial or scientific equipment, the committee on fiscal affairs decided to exclude such income from the definition of royalties. Commentary as per Article 12, para 11, has further classified "royalties" as follows:
11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, para 2 alludes to the concept of 'know-how'. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the 'association des Bureaux pour la Protection de la Propriete Industrielle' (ANBPI), states that 'know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique'. In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Thus, payments obtained as consideration for after-sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant, do not constitute royalties within the meaning of para 2.
Finally, vide para 16, it was also formulated that, "Each case will depend on its particular facts but in general such payments are likely to be commercial income within Article 7, or a capital gains matter within Article 13, rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated in full or in part, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency." So, an important guideline was issued that where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the said article do not apply. This statement is also lifted from Clause 15 of commentary on Article 12 of the cited OECD and the rights involving consideration in the form of a substantial lump sum payment has duly been considered as is the case in hand. So, in view of this tax convention between OECD member countries, no ambiguity is left and by the application of Section 90 of the IT Act as well as the law laid down in the case of Davy Ashmore (supra), the article of this convention has to apply in all those cases wherein the contracting parties are governed by the DTAA.
16. We have also laid hand on an authority on this subject, namely, Klaus Vogel on Double Taxation Convention, as per IIIrd Edition, Article 12 pertaining to the royalties having elaborated consideration and comparing certain model convention. The first aspect which was clarified was that Article 12 of OECD prescribes that royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if such resident is the beneficial owner of the royalties. 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 literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." The renowned author has discussed several articles on model convention, defines the term know-how and made a clear-cut distinction between royalty and quoted that a distinction must be made between letting the licenced asset for use, on the one hand and transferring its substance by alienation. The decisive difference in this connection was quoted as the degree of change in the attribution of the assets from licensor to licensee. On the other hand, another distinction was also made that letting the property, on one hand, and use of it by the licensor, on the other hand, has a distinction. The outright alienation has a clear-cut distinction from right of use. The author has also made a distinction between the terminologies generally used in such contracts i.e. "consideration for use" and "the right to use". The author has also examined mixed contracts. We have seen that this issue has also cropped up in some of the appeals discussed above. Interestingly, the author has also come across a decision of Bangalore Tribunal in the case of AEG Aktiengesselschaft v. IAC (supra) and agreeing to this decision, mentioned that royalties can be distinguished from fees for technical services.
Article of DTAA
17. Before we examine several precedents on this subject, it is necessary to peruse the relevant articles of DTAA between Federal Republic of Germany and Republic of India. Article VIII-A of DTAA has defined 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 literary, artistic or scientific work including cinematograph films, 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 equipment, or for information concerning industrial, commercial or scientific experience.
This definition has indicated that royalty is an information in the form of industrial, commercial or scientific equipment based upon the industrial, commercial or scientific experience. Though under Article VIII-A royalty arising in a Contracting State and paid to a resident to the other Contracting State is subject to tax in that other State but an exception is prescribed in Clause 5 of this article, according to which, if beneficial owner of the royalty being a resident of a Contracting State carries on business in the other Contracting State in which the royalty arises through a PE situated therein and the right in respect of royalty paid is effectively connected with such PE then in such cases Article III of DTAA shall apply which means that Article III prescribes the profits of enterprise of Contracting State shall be taxable only in that State, unless the enterprise carries on business in the other Contracting State through a PE situated therein. The cumulative effect of these two articles is that first of all the nature of payments should fall within the term "royalty". If the foreign collaborator had no PE in India then the royalty is subject to tax in the Contracting State in which it arises and the tax so charged shall not exceed 20 per cent. However, in case it is established that the foreign collaborator has a PE then in such a situation the profits thereon shall be taxable only in that State. Due to the exceptions of these two articles in DTAA between India and West Germany, the arguments raised from the side of the assessee were two-fold, firstly, the nature of payment did not fall within the definition of "royalty" as defined in the agreement and, secondly, if it be so, the same was not subject to tax in India because there was no PE of the said collaborator viz., M/s Uhde.
Provisions of IF Act vis-a-vis articles of DTAA
18. One more important argument has been raised by Mr. Khare about the applicability of several provisions of DTAA vis-a-vis the applicability of provisions of IT Act which is in respect of "agreement with foreign countries". The learned Authorised Representative has relied upon Section 90(2) of the IT Act which reads as under:
(2) 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.
So, this sub-section has clearly stated that where the Government has entered into DTAA, with another country for granting relief of tax for avoidance of double taxation, then the provisions of income-tax shall apply to the extent they are mow beneficial to the assessee (emphasis, italicized in print, supplied). In support of this argument, a decision of Tribunal, Delhi Bench, in the case of Munjal Showa Ltd. v. ITO (supra) was cited. In that appeal, as per contract agreement, the assessee company had received the licence to use the industrial property right for manufacture of shock absorbers and also technical documents and know-how relating to the process for manufacturing shock absorbers. The agreement was composite, however, the issue was in respect of technical know-how and services in connection with manufacture of shock absorbers. Assessee has sought drawings and designs of equipments in order to fabricate plant and machinery in India. The Japanese company has charged a consideration towards cost of supply of know-how and design, etc. Revenue's case was that the said consideration was in the nature of royalty as defined in Expln. 2 to Section 9(1)(vi) of the IT Act. It was also directed by the AO to deduct tax at source. The first appellate authority has taken into account DTAA between India and Japan and held that the payment was in the nature of royalty covered by Article X(e), thus subject to tax as provided in Article III(6) of DTAA. So, the question before the Tribunal was whether such supplying of drawings and designs was an outright sale and consideration paid was whether a commercial profit of Japanese company within the meaning of Article III of DTAA. The question was answered in affirmative, hence it was held that since the Japanese company had no PE in India, therefore, the payment made was exempt from tax in India. This precedent thus also supports the stand taken by the assessee.
18.1 A well known case of Hon'ble Calcutta High Court in the case of CIT v. Davy Ashmore India (supra) on the question of applicability of Section 90 vis-a-vis Expln. 2 to Section 9(1)(vi) has also been strongly relied upon. This case has decided both the issues i.e. the beneficial applicability of DTAA clauses in supersession of the provisions of IT Act as well as the conditions under which "royalty" falls within the ambit of Section 9. The Court has clearly held that as "royalty" has been defined in the DTAA between India and UK, therefore, Expln. 2 to Section 9(1)(vi) of the IT Act shall not have any application and the DTAA shall be applicable. In respect of the term "royalty", the Hon'ble Court has held that "the non-resident did not retain the property in the designs and drawings. The designs and drawings were imported under the import policy with the approval of the RBI on the basis of the letter of intent. The import of the designs and drawings postulated an out and out transfer or sale of such designs and drawings. The consideration paid for the transfer was not assessable as royalty." So, in unequivocal terms, both the issues have been decided in favour of the assessee.
Precedents cited by Revenue
19. Now, we will consider all the decisions cited from the side of the Revenue. At the outset, we want to clarify that some of the decisions are altogether not concerned with the issue in hand and from the written submissions advanced from the side of the Revenue, it is also not clear why these decisions have at all been cited. Even then, for the sake of completeness, we have reproduced those decisions and to be dealt with as and when deem it necessary. In this context, the decision in the case of Hemalatha Gargya v. CIT (supra) is in respect of interpretation of statute while deciding the issue of VDS, 1997. As far as the interpretation of any charging section is concerned, undoubtedly, the same has to be interpreted as written in the statute. We will discuss in the following paras, the charging section as well as also discuss the law applicable in respect of interpretation of statute. Likewise, the decision of Gursahai Saigal v. CIT (supra) also deals with rule of construction and held that it is well recognised "that the rule of construction that if a case is not covered within the full corners of the provisions of a taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter, applies only to a taxing provision and has no application to all provisions in a taxing statute." The law so laid down by the Hon'ble apex Court has to be followed and the provisions contained in a taxing statute have to be constructed in an effective and workable manner and so this rule shall be followed by us while deciding this appeal. There is one more decision cited by the learned Departmental Representative in the case of ITO v. T.S. Devinatha Nadar (supra), wherein the ratio laid down was that the decisions of Hon'ble Supreme Court has to be followed and the issue settled by the apex Court generally reaches to its finality. Undoubtedly, we have to follow the ratio laid down in this decision as well because all the subordinate Courts are duty-bound to adhere to the law of the land. Again, the decision cited by the Revenue was the case of CIT v. Podar Cement (P) Ltd. (supra) which is, firstly, in respect of interpretation of taxing statute. In this case, the term "owner" has also been defined in respect of transfer of property and held that having regard to the ground realities, "owner" is a person who is entitled to receive income from the property in his own right. Need not to mention we are going to follow the ratio laid down in this judgment. Next is the decision of Allied Motors (P) Ltd. (supra) which is also in respect of interpretation of statutes and the Court has held that it should be a reasonable construction and a rule of reasonable construction must be applied while construing a statute. Undoubtedly, the rule so laid down by the apex Court has to be followed while interpreting provision of a statute. As far as the decision of Kedamath Jute Mfg. Co. Ltd. v. CIT (supra), is concerned, the same is wrongly cited by the learned Departmental Representative because the issue discussed therein has no connection with the present appeal.
19.1 The decision in the case of CIT v. Neyveli Lignite Corporation (supra), has discussed the meaning "royalty". The Court has defined the said term as follows:
The term 'royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as 'royalty'.
In this precedent, it was held that the price paid by the assessee to the supplier was a total contracting price which covered all the terms involved in the supply of machinery from the stage of design to the stage of commission. The design supplied was not to enable to the assessee to commence the manufacture of the machinery itself with the aid of such designs. The contract between the assessee and the manufacturer did not in any way refer to any specific patent owned by the supplier which the buyer was permitted to accept. All that the contract provided was an indemnity to the buyer to protect the buyer against any action by a third party claim, patent, trademark or other rights in the equipments supplied. The Hon'ble Court has given a finding that there was no transfer or licence of any patent, invention, model or design. The design referred to in the contract was only the design of the equipment required to be manufactured by the supplier abroad and supplied to the predecessor. No licence to any patent is involved, so the Hon'ble Court has held that the payments made were not liable to deduction of tax at source. This decision is squarely in favour of the assessee and directly on the issue in hand though cited by the learned Departmental Representative, Mr. Satyakam Mishra. As far as the general ratio laid down in respect of interpretation of a document is concerned, undoubtedly, a document or agreement has to be read as a whole unless some part of which is illegal. Since this precedent is in favour of the assessee, therefore, while dealing with the cases cited by the learned Authorised Representative, Mr. Khare, we will refer it again.
19.2 An important decision of Bangalore Bench in the case of AEG Aktiengesselschaft v. IAC (supra) was cited wherein the decision in the case of CIT v. Davy Ashmore India (supra) was duly considered and it was held that if there was any conflict between the tax law and DTAA, the provisions of DTAA would prevail over the provisions of tax laws. One more issue was considered by the respected Co-ordinate Bench that whether the non-resident, company was providing technical services to Indian company and, therefore, engineering fees were not in the nature of supplemental payments towards cost of plant and machinery supplied by the assessee but were in nature of fees for technical services within the meaning of article of DTAA, it was held "yes". Further, whether in view of the fact that the payments were made by non-resident bank outside India, it could be said that there was no accrual of income in India, therefore, deeming provisions regarding taxability of amount in India contained in the clauses of DTAA were inapplicable, it was held "no". So, the said Coordinate Bench has held that the AO was justified in treating the engineering fees as fees for technical services and charging it to the tax @ 20 per cent. We have carefully examined this decision and have found that as far as the first limb of this judgment is concerned, there is no dispute that the clauses of DTAA shall prevail upon the provisions of IT Act. In the following paras, we are definitely going to follow this limb of cited decision of Hon'ble Calcutta High Court. The next limb of this argument is in respect of supplemental payments contended to be towards cost of the plant and machinery. The admitted fact, as noted by the Tribunal Bench, was that there was a separate provision in the contract for making payment by the Indian company to the assessee towards such cost of plant and machinery. Since the agreement between the parties in that case showed two different payments and the payment under consideration had been termed in that agreement as "engineering fees", then in that context, it was held that the fees was covered under Article VIII-A of the amended DTAA between the two parties and even within the terms of Section 9(1)(vii) r/w Expln. 2 of the IT Act. So, we have to examine whether in the present appeal also, the payment in question was separately mentioned as a "fees" and segregated from the payments towards cost of technical information and know-how supplied by the foreign company. It may not be out of place to mention, at the outset that considering the factual matrix as stated supra, there was no such segregation and the entire agreement was in respect of process of design documentation and technical know-how. Due to this distinction, this limb of the precedent need not to be followed. Further, we are going to examine the exact nature of the payment agreed upon in the light of terms of the agreement between the contracting parties.
19.3 Mr. Satya Prakash, learned CIT-Departmental Representative, has strongly relied upon the decision in the case of Asstt. CIT v. Hewlett Packard Ltd. (supra). This is an important decision decided by the Tribunal, Delhi Bench, wherein several judgments for and against the issue have been considered and thereafter having regard to the fact of that case, it was held that receipts have fallen within the definition "royalty" and were exigible to tax in India under Article VIII-A of DTAA. In that case as well, the DTAA was between India and Germany, as in the present appeal. Whether this decision is in line with the facts in the present appeal, we have examined few important clauses of the agreement between the contracting parties. In that case, the AO has given a factual finding which was reproduced by the respected Co-ordinate Bench vide para 24 of this decision, reproduced below:
24. The AO held as under:
On a proper interpretation of the collaboration agreement, it can be inferred that limited interest in the know-how was transferred and on reading of all the clauses together, there was no independent and outright sale of know-how. Reliance is made on the Special Bench judgment of the Bombay Tribunal reported in (1986) 26 TTJ (Bom)(SB) 566 : (1987) 22 ITD 87 (Bom)(SB) which lays down the proposition that even if the fee paid is for transfer of technology, the same will have the character of 'royalty'. It held that if the fee paid is of the nature of royalty the extent of legal or other protection available in relation to the subject-matter or contract will not help in coming to a different conclusion.
On the other hand, the case of the assessee before the Revenue authorities was that according to the terms and condition of the agreement, there was segregation of payment and there were separate clauses in respect of each type of payment, hence the same should not be clubbed together and held as royalty. After detailed discussion and on examination of plethora of judgments, the respected Co-ordinate Bench has given an observation vide para 48 as under:
48. A perusal of this judgment shows that the limitation period of 10 years was crucial in arriving at the conclusion that the payment was of the nature of royalty. In the facts as they stand before us, the limitation period is five years which advances the case of Revenue that the transfer is of user of technology and not a case of outright sale of technology.
So, the facts which have clinched the issue were two-fold, firstly, that there was a limitation period of 5 years which was held as the relevant fact to decide the issue and, secondly, the rights were granted only for the user of the technology and a finding given that there was no clause for permanent handing over of design. Due to these two reasons, the Tribunal has held that there was handing over for the user for a limited purpose and limited period. At this juncture, it is justifiable to simply mention that we have conscientiously examined the facts and the law laid down in this precedent, so as to examine the present appeal in the light of this decision.
On "admissibility" and "jurisdiction"
19.4 Few decisions have been cited in respect of admissibility of this appeal by the learned Departmental Representative in respect of Section 248 of IT Act and Section 246(1)(c) of IT Act. The first plank of argument of learned Departmental Representative was that the assessee has not paid the tax and simply furnished a guarantee, so furnishing of bank guarantee did not amount to "actual payment" as prescribed in this section. Reliance placed on the decision in the case of Asstt. CIT v. Mugat Dyeing & Printing Mills (supra). We have examined the facts of that case which were in respect of Section 43B of IT Act and in that regard, the decision was about the entitlement of deduction of excise duty liability. In this context, the Co-ordinate Bench has held that the assessee shall be entitled for such deduction in the year when the amount shall be paid and not in the year when the fixed deposit of the bank was made as a bank guarantee. Without much further elaboration, we want to mention that a particular case law has to be applied in the context it was rendered and not otherwise. About the admissibility of this appeal, one more argument was raised by Mr. Mishra, the learned Departmental Representative, that the said foreign company could have filed the appeal and the assessee should not have any grievance as far as the TDS matter is concerned. For this proposition, he relied upon the decision in the case of Transmission Corporation Ltd. (supra). The context before the Hon'ble Court was scope of Section 195 wherein it was held that a person making payment may file an application before the AO for determination of sum chargeable to tax. In case, where no such application is filed, then the tax must be deducted on gross sum. Though the Court has observed that the said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected, but still, the Hon'ble Court has further held that the only thing which is required to be done is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of recipient and for determination of the appropriate proportion of such sum so chargeable or for grant of a certificate authorizing the recipient to receive the amount without deduction of tax or deduction of income-tax at any lower rate. On such determination, the tax at the appropriate rate could be deducted at the source. In that case, owing to the failure of the electricity board to deduct such tax, it was deemed to be an assessee in default in respect of tax deductible at source. Naturally, the consequence of this judgment is that the person if held deemed to be in default in respect of TDS, then he has a redressal and can call for intervention by filing an appeal before the appellate authorities. So, as a matter of fact as well as a matter of law, this right of appeal cannot be denied because under this right only on identical situation, the issue has gone upto the apex judicial authority.
20. As far as the decision of ITO v. Tata Iron & Steel Co. Ltd. (supra) as cited by the learned Departmental Representative is concerned, on examination of the ratio laid down therein, it is worth concluding that the same may be treated as held in favour of the assessee. The respected Co-ordinate Bench has stated that before filing an appeal, undisputedly under Section 248, assessee must deduct tax due from non-resident and must also pay the same to the Government. In case assessee did not make full payment, even then assessee should be given liberty to pay the tax and should also be given right to file a fresh appeal along with an application for condonation of delay. Therefore, this citation has also not denied the right of the appeal to an aggrieved party i.e. the assessee. As far as the appeal in hand is concerned, this is not in dispute that the taxes have been deducted and paid to the Government thought at first instance, furnished a guarantee but later on converted into actual tax payment, as duly certified by bank. It is interesting to note that the learned Departmental Representative has cited a decision of Raza Textiles Ltd. (supra) wherein also, the Hon'ble Court has expressed the same view as we have discussed hereinabove and for ready reference a portion from the note is reproduced below:
Held also, that the provisions of Section 30(1A) which required that a person seeking to file an appeal thereunder, must have first deducted tax at source and paid the tax deducted to the Government, could not apply to the case of a person contending that the person to whom he made the payment was not a nonresident.
No authority, much less a quasi-judicial authority, can confer jurisdiction on itself by deciding a jurisdictional fact wrongly. The question whether the jurisdictional fact has been rightly decided or not is a question that is open for examination by the High Court in an application for a writ of certiorari.
It is incomprehensible that a quasi-judicial authority like the ITO can erroneously decide a jurisdictional fact and thereafter proceed to impose a levy on a citizen.
So, the Court has laid down that it is incomprehensible that a quasi-judicial authority like ITO may decide a jurisdictional fact and on its own proceed to impose a levy on a citizen. So, the verdict clearly supports the view that the fact whether a non-resident is subject to tax is definitely a question of law to be decided in appeal if the AO has conferred jurisdiction on itself by wrongly deciding such jurisdictional fact. In simple words, a right of appeal very much lies in such matter and the arguments of learned Departmental Representative are ill-founded and against the accepted principle of law as laid down by several authorities.
20.1 After duly considering the series of decisions cited from the side of the Revenue and have also examined their applicability on the issue in hand, now we proceed to examine the case law cited from the other side, i.e., the respondent-assessee.
Precedents cited by the respondent
21. At first, Mr. Khare, the learned Counsel has strongly relied upon the decision in the case of Scientific Engineering House (P) Ltd. (supra). In support of his argument that any lump sum payment made to acquire technical know-how to facilitate the operation and process of a machinery fall within the acquisition of capital assets and such technical know-how in the shape of drawings, designs, charts and processing data and other literature thus fall within the definition of "plant". The Hon'ble Court has held that the term "plant" do not confine to an apparatus which is used for mechanical operation or process. The Court has expressed that the documents though could not by themselves perform any mechanical operation or process, that cannot militate against there being a plant since they were in a sense the basic tool of the mechanical or industrial operation. If we examine the facts of the present case in the light of the ratio laid down by Hon'ble apex Court, we may find that the agreement in question was for supply of technical information including know-how, process, design and information for the purpose of manufacture of EDC, PVC etc. Undisputedly, assessee was establishing a polyvinyl chloride complex for manufacturing of PVC. The entire process of manufacturing, thus cannot be segregated from the know-how and design engineering fees. At this juncture, we may also clarify that we are not concerned with the technical know-how fees because this is not the issue raised by either side and confined ourselves only to "design engineering fees". Once such designs are part and parcel of the commissioning and processing and manufacturing of a product, then naturally, the ratio laid down by the Hon'ble Court in the case of Scientific Engineering House (supra) can be safely followed, but will a little distinction on facts.
21.1 Next are few decisions of Tribunal, Pune Bench, namely, in the cases of Be-Delft Electronics (para supra) and Toshniwal Instruments Ltd. (para supra). Both these decisions were on the subject of "royalty" as well as on the subject of "PE". The issue dealt with by the Co-ordinate Benches appears to be identical with the present appeal because in one of the case, the agreement has made a distinction from the "licensed product" and "technical information". Insofar as the payment against transfer of "technical information" is concerned, in that appeal too, the assessee had itself deducted the tax at source; the controversy was only in respect of payment against supply of initial data package defines as "licensed product". Identical was the situation that the said product was transferred outrightly in favour of the assessee by a non-resident company. While deciding the issue in favour of assessee, the Co-ordinate Bench has taken the support from the case of Swadeshi Polytex Ltd. (supra). In Swadeshi Polytex, assessee was establishing a polyster staple fibre plant in India with collaboration of a German company. Assessee entered into an agreement for supply of technical know-how. Foreign company did not have any PE in India as in the present case. Assessee was to pay consideration for use of technology transfer. So, the question was whether receipts in the hands of German company would be taxable and in this regard the Co-ordinate Bench has held that the German company would be taxable in Germany and not in India. There was also a secrecy clause in the agreement but the Co-ordinate Bench has held that the said clause would not militate against the assessee because there was an outright sale of technical know-how subject to certain conditions. Rather, it was held that such conditions and clause have actually went in favour of the assessee. This was an important decision which was later on followed quite occasionally like in the case of Be Delft Electronics (supra) by Pune Bench. This is quite a comprehensive decision of Pune Bench wherein a decision of Calcutta High Court in the case of N. V. Philips (para supra) has also been considered which was cited from the side of the Revenue. The decision of N.V. Philips (supra) was in respect of "royalty". It is worth mentioning that while perusing this decision, we have come across another decision of the same High Court in the case of N.V. Philips Gloeilempenfabrieken v. CIT (supra). In the former decision, the non-resident company entered into an agreement with an Indian company under which it was agreed to furnish to Indian company the technical information relating to Vitamin D and its manufacture. The agreement envisaged to furnish information in respect of working methods, manufacturing process, methods of analysis and quality control, etc. The said foreign company was entitled to receive 5 per cent of the net selling price of the manufacturing product as consideration for supply of both technical assistance and information. It was observed by the Hon'ble Court that there was a significant distinction between technical assistance and information. The "information" agreed to be supplied by the foreign company was in respect of working methods of the product which were considered to be exclusive information only available to the assessee and not generally disseminated, so payment in respect thereof was held in the character of royalty. So, the distinction made by the Hon'ble Court itself is glaring leaving no scope of doubt. In the latter decision, as cited above, there was a composite collaboration agreement, so in that context, since the agreement was for supply of know-how as well as for supply of information necessary for setting a plant, so the Hon'ble Calcutta High Court has held that 50 per cent of the amount was to be held in the nature of royalty and 50 per cent to be fees for technical services. Coming back to the decision of Be Delft Electronics (supra), the Tribunal, on construction of the agreement between the assessee and the Indian company and the meaning and connotation of the word "royalty", held, inter aha, as follows : (a) The payments had been made by the Indian company to the assessee under an agreement for the use of rights in the nature of a patent, (b) Even though no patent had been obtained by the assessee in respect of the know-how, information and technical assistance supplied by the assessee to the Indian company, payments in respect thereof would still be payments in the nature of royalty, (c) Some of the information to be furnished by the assessee including data, instructions and directions for the setting up of a plant as also general information in respect of the product to be manufactured would, however, amount to rendering of technical service and payment received in respect thereof would not be "royalty". So, an important distinction has been made that once the entire amount was in the nature of a fees for technical services rendered, as,sessee did not segregate which part of the payment should be allocated against the technical services rendered by it and which part should be allocated towards supply of technical know-how; the secret process to be in the nature of royalty, then a fair estimation of 50 per cent could be made. Both these decisions definitely laid down the guidelines to determine the issue whether a particular information is a royalty or not. This distinction was also fairly considered by the Pune Bench and thereafter, came to the conclusion that the consideration paid in that case was an outright transfer of technology, i.e., initial data package which was not in the nature of "royalty". These precedents are definitely a guiding factor to decide this issue now as raised by the Revenue.
21.2 Another decision of Pune Bench has also been cited by Mr. Khare, namely, Toshniwal Instruments (supra), para 10.4. In that case, the consideration comprised of two parts, one was royalty for which TDS was deducted, the other part was for supply of tailor-made technical know-how documentation. For the latter part, the claim of the assessee was that the same was in the nature of business profits not taxable in India, for which, assessee applied for No Objection Certificate for payment without deduction of tax under Section 195(2) of the IT Act. The first appellate authority has held that there was an outright purchase for permanent use, so taxable as business profits. Since there was no "PE" of the collaborator in India, hence it was directed by CIT(A) to refund the tax deducted. The Tribunal has endorsed the said view of the first appellate authority on both the counts, firstly, that the said non-resident collaborator had no PE in India and, secondly, the payment in question was for outright purchase of technical documentation for which consideration was payable in that case in France. In that case also, the agreement did not provide duration or period nor did it provide that the said technical documentation was to be returned to the supplier. The respected Co-ordinate Bench has followed the decision in the case of CIT v. Davy Ashmore India Ltd. (supra) and also a decision of Special Bench in the case of Graphite Vicarb India Ltd. (supra). This decision of Co-ordinate Bench applies in all fours in the context of present appeal. We have also examined the decision of Special Bench in the case of Graphite Vicarb India (supra) where an Indian company entered into a collaboration agreement with a French company. The French company was to transfer outside India the technical know-how far the manufacture of graphite equipment. Clauses of the said agreement provided for a transfer of know-how on payment of a lump sum consideration of Rs. 1 million in three equal instalments. The said agreement was approved by the Government of India. At the time of the first remittance, the assessee deducted tax at source under Section 195(2) @ 20 per cent and sought a NOC from the ITO. It was claimed that the lump sum fees was not chargeable under the terms of DTAA between India and France. The issue before the Special Bench was in respect of the second instalment payment which was two-fold, firstly, applicability under Section 248 r/w Section 195(2) as well as taxability of lump sum consideration whether under Article VIII of the DTAA as royalty. Both these issues have been decided in favour of the assessee as per following two paras reproduced below from the headnotes:
Held, (i) that the issue had since been decided by the Supreme Court in the case of CIT v. Wesman Engg. Co. (P) Ltd. .
It was held that Section 195(2) is a special provision for determining the chargeability of any sum remitted to a non-resident and consequently the AAC was competent to entertain an appeal under Section 248. It was further observed that the right to appeal under Section 248 was not restricted to total denial but covers even a partial denial with reference to a part of the payment subjected to deduction of tax at source and the language of Section 248 was made enough to cover any order passed under Section 195.
(ii) That the main question was whether the payment of the lump sum was entitled to exemption. Under Article III of the DTAA 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 PE 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 States 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 PE 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 that 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 DTAA between India and France and since, admittedly, the foreign company had no PE in India, it was not liable to be taxed in India.
"Permanent establishment" defined
22. The next question for our consideration is the conditions to determine the PE in India. In this regard, support was drawn from the case of Swadeshi Polytex Ltd. (supra). It was held that since the admitted position was that the said foreign company did not have any business connection in India as well as did not have any property in India, hence the payment made to such company would not fall within Section 9(1) of the IT Act. In that case also, one of the contracting parties was a resident of Germany, as in the present appeal. The German company has transferred technical know-how to the assessee company in consideration of DM and that transfer was not merely a right to its use. In that context, it was held that the said payment did not fall within the definition of term "royalty" under DTAA between India and Federal Republic of Germany. Further, it was clarified that once the receipt was not a royalty, then it would be taxable in the hands of German company under Article V of DTAA but since the admitted position was that the said German company had no PE in India, so the amount was held as taxable not in India but in Germany. The assessee was exempted from deduction of tax at source in respect of payment for transfer of technical know-how. So, it is pertinent to mention that the series of decisions directly stand in favour of the assessee. Almost on identical situation, in the case of Graphite Vicarb India Ltd. (supra), it was held that the parties to collaboration agreement had clearly bifurcated the consideration by stating that the lump sum consideration for transfer of technical know-how abroad will be an outright sale and will be independent of royalty which as per the fact of that case was payable for the right to use that know-how. In respect of the second instalment in that case, it was held that the amount paid was commercial profits within the meaning of Article (iii) of DTAA between India and France, however, it was held that since the said foreign company had no PE in India, so not liable to be taxed in India. In this manner, the Special Bench has given findings in respect of both the issues i.e. the question of the nature of royalty as well as the question of taxability in case of no PE in India. Though in that case there was a lump sum consideration, but there was a bifurcation of the said consideration and that bifurcation was approved by the Government of India. Due to this reason, it was held that the portion of lump sum consideration pertaining to transfer of technical know-how being an outright sale will be independent of royalty. It was held that the royalty is subject to tax for the portion pertaining to the right to use of that know-how. So, even in that complex situation, when there was payment in respect of royalty mixed with the payment of outright sale of know-how, the respected Co-ordinate Bench has duly considered both the conditions and thus segregated both the amounts in question. As far as the appeal in hand is concerned, there is no such complex situation, so the view taken in this precedent can be followed in most simplistic manner.
22.1 Though hereinabove, we have gone through number of decisions wherein the term "royalty" has been considered and defined but even then, a decision of Delhi Bench in the case of DCM Ltd. v. ITO (supra) is worth mentioning because there was an agreement with a foreign enterprise for transfer of comprehensive technical information, know-how and supply of equipment by the foreign enterprise to the assessee. One more provision was there that the assessee was entitled to sub-license its right to another party in India. The payment condition was in four instalments. The view of the Revenue was that the assessee has simply acted as an agent and the payment was in the nature of royalty. On the other hand, the claim of the assessee was that the payment constituted business profits of the said foreign concern. Since the foreign party had no PE in India, the payment was held not taxable and it was also held that the payment was not in the nature of royalty. Para 7 wherein the term "royalty" was duly considered is as follows:
7. Therefore, we have to examine the definition of 'royalty' under the DTAA rather than under the IT Act, 1961. It would, therefore, not be necessary to look at the dictionary meaning of the said term or even to refer to the Circular dt. 9th Aug., 1969, of the Board dealing with the nature and meaning of this term. A perusal of the technical collaboration agreement shows that the amount of Franc 1,55,000 was to be paid by DCM to TL once for all as consideration for the grant of licence and the disclosure of the know-how. Para 2 of the said agreement provided that TL was to grant DCM the right and full but non-transferable licence to practise the TALO processes at its existing factories. The DCM could sub-licence its rights to another Indian party with the consent of TL and with the approval of the Government of India. Para 3 of the said agreement provides for the disclosure of the know-how of which the details appear from paras 3.1 to 3.9. We find that the definition of 'royalty' under Expln. 2 to Section 9(1)(vi) of the IT Act, 1961, is not the same as the definition of the term under Article XIII(3) of the DTAA. As rightly submitted on behalf of the assessee, the definition under the DTAA is a truncated one, i.e., it is narrower than the definition under the IT Act. A comparative look at the two definitions shows that the following part of the definition which occurs in Expln. 2 to Section 9(1)(vi) of the IT Act, 1961, does not figure under Article XIII(3) of the DTAA:
(i) The transfer of all or any rights (including the granting of the licence) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property; and
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trademark or similar property.
The know-how is an intellectual property and the excluded clauses referred to above pertained to the know-how of secret formula or process and the imparting of any information concerning the working thereof. The assessee, in our view, is right in submitting that the things for the transfer of which DCM agreed to pay to Tl, franc 1,55,000 as such squarely fell within these two exclusionary clauses which do not form part of the definition of the term 'royalty' under Article XIII(3) of the DTAA. The IT authorities in our view, were not right in being influenced by the term 'payment of any kind' preceding the definition of this term under the DTAA....
22.2 After giving a finding on the issue of royalty, the respected Co-ordinate Bench has also taken into account the term "PE". Once it was certified by the contracting party that it had no PE in India and the business had not been carried through a fixed place of business in India either wholly or partly, therefore, it was held that the said business were neither under the main definition nor under the inclusive part thereof, so that it could be said that the said foreign collaborator had a PE in India. For both the reasons assigned therein, the issue was decided in favour of the assessee.
23. Though the discussion, as made elaborately hereinabove, it is amply clear that the consideration in question did not fall under the category "royalty". However, one cannot ignore a decision of Hon'ble apex Court in the case of Scientific Engineering House (supra), which was heavily relied upon by the assessee in support of his argument that the nature of payment in terms of collaboration agreement had fallen in the category of "plant". The Hon'ble Court has observed that the tenure of the agreement showed that the various documents such as drawings, designs, charts, processing data and other literature included in the certificates, the supply whereof was undertaken by the foreign collaborator, more or less, formed the tools by user by which the business of manufacturing the instruments was to be done by the assessee and for acquiring such technical know-how, a lump sum payment was made. The Court has held that the said lump sum payment was the expenditure of capital in nature, as a result, a capital asset of technical know-how in the shape of drawings, designs, etc., was acquired by the assessee. In that respect, it was held that such designs, etc. were a tool of his trade and a conclusion was drawn that such documents being necessary for carrying out the mechanical operation or process, hence, would fall within the definition "plant". A portion from the head notes is reproduced below:
True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basic tools of the assessee's trade having a fairly enduring utility, though owing to technical advances they might or would in course of time become obsolete. Therefore, the capital asset acquired by the assessee, namely, the technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature falls, within the definition of 'plant' and is, therefore, a depreciable asset.
As far as the present lump sum consideration in question is concerned, we are not inclined to go that far, because technically speaking, the question before the Hon'ble Court was in respect of depreciation. In that context, the verdict was given by the Hon'ble apex Court. The rule of application of a "precedent" is well known that a decision is a precedent on its own fact because each case presents its own feature so as to apply the ratio of the decision in the context it was held considering the facts and legal aspect of a particular case with due care. Though the law of "stare decisis" i.e. binding nature of precedent delivered by the higher judicial authority is manifest, nevertheless, the context has to be examined leaving no room for doubt about seeing the tone and tenor under which the quoted decision is delivered. Therefore, we withhold ourselves and do not prescribe a clear finding on this proposition of Mr. Khare whether the lump sum consideration in question was in the nature of capital asset and the documentation was in the nature of plant.
24. An interesting situation has cropped up before Jaipur Bench since there was a difference of opinion in the case of Modem Threads (India) Ltd. (supra) which was resolved by a Third Member decision cited as (supra). Therein as well, the meaning of royalty was defined and held that the amount paid for supply of technical know-how for designing, construction and operation of plant in India was not in the nature of royalty as defined in DTAA with Italy. To resolve the dispute, firstly, a finding was given that the said Italian company did not have a PE in India. A certificate to that effect was furnished confirming the absence of any PE in India. Thereafter, the clauses of agreement between the contracting parties were examined. There was a clause of secrecy as well as there was a clause that after the expiry of 15 years, the assessee was entitled for free use of the documents. In that context, it was inferred that the assessee has become the owner of the rights which he got through agreement. Since there was a gap of time in conferring of certain rights, hence the Revenue was agitating that the assessee was not the absolute owner of the rights at that point of time. The Hon'ble Third Member has discussed at length several case law, few of them are worth reproduction, namely, Graphite Vicarb India (supra), DCM Ltd. (supra), Citizen Watch Co. v. IAC (1984) 148 ITR 774 (Kar), Swadeshi Polytex Ltd. (supra), CIT v. Gilbert & Barkar Manufacturing Co. 1977 CTR (Bom) 347 : (1978) 111 ITR 529 (Bom), CIT v. Koyo Seico Co. (1998) 148 CTR (AP) 201 : (1998) 233 ITR 421 (AP). The respected Bench has also examined the term "royalty" as defined in K.J. Aiyer's Judicial Dictionary and has described in Black's Law Dictionary. The concluding para is worth reproduction:
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 the DTAA/s. 9(1)(vi) of the IT 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.
So, the Hon'ble, Bench has held that the Revenue was not justified in taxing the said payments in India treating the same as "royalty". Another decision of Kolkata Bench in the case of Dy. CIT v. ITC Ltd. (supra), is worth citation because therein as well, it was held that installation and commissioning fees received by the French company were not exigible to tax in India and it was held that the assessee was not under any obligation to deduct tax at source from the remittance made to the French company, especially when it was not attributable to any PE.
25. Having regard to the facts of the case and considering the totality of the circumstances, in the light of elaborate discussion made hereinabove, and several precedents cited, we are of the considered view that the company, namely, M/s Udhe GmbH, Germany, has transferred design engineering to the assessee and such an alienation was not merely a right to use but an out and out transfer or sale which was used by the assessee for establishing and commissioning a polyvinyl chloride complex; as duly distinguishable from technical information in the said collaboration agreement vide, Articles 3.2 and 3.5 of the impugned agreement. The consideration is also distinguishable in respect of technical information as prescribed in Article 4.1.1 from the lump sum consideration fixed for process and designing documentation fees prescribed in Article 4.1.2 of the impugned collaboration agreement. So, we hold that the consideration paid for transfer of design documentation was not in the nature of royalty as defined either in the articles of DTAA or in Section 9(1)(vi), Expln. 2 of IT Act. Further, we hold that considering the admitted position based upon evidence placed on record, the said German company had no PE in India. Ex consequenti, we are satisfied that there was no obligation upon the assessee to deduct the tax in respect of payment of design documentation fees, so the learned CIT(A) has rightly allowed the claim of the assessee and there is no infirmity in the said directions. We uphold the same. Before we part with, we may mention a word of appreciation to the learned Representatives of both the sides for their valuable assistance rendered in deciding these appeals.
26. In the result, Revenue's appeals are dismissed.