Case Law Details
Payment made for transfer of comprehensive technical information and know-how which included all trade secrets and technical information, designs and drawings, etc. cannot be treated as income from royalty under the India-UK tax treaty
Recently, the Delhi High Court in the case of CIT v. DCM Limited (ITR Nos. 87-89/1992) held that payments made for transfer of comprehensive technical information and know-how, which included all trade secrets and technical information, designs and drawings, etc. cannot be treated as income from royalty under the India-UK tax treaty (tax treaty). Accordingly, the taxpayer was not liable to deduct tax on the payments made to the foreign company.
The High Court also observed the scope of the definition of royalty under Section 9 of the Income-tax Act, 1961 which includes “transfer of all” or “any right”. Accordingly, the transaction of taxpayer would have been covered under definition of royalty under the Act. However, the High Court held that the definition of royalty under the tax treaty will apply to the taxpayer since it was more beneficial.
Full Text of the case Law is as follows:
Commissioner of Income Tax Vs D.C.M. Limited
IN THE HIGH COURT OF DELHI AT NEW DELHI
SUBJECT: INCOME TAX ACT, 1961
Judgment reserved on: 14.02.2011
Judgment delivered on: 10.03.2011
ITR Nos. 87-89/1992
ORDER
RAJIV SHAKDHER, J
1. The captioned references arise out of the orders passed in ITC No.95- 97/1990. We were informed that only question of law which was to be answered is as follows :-
“Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that no tax was to be deducted at source under the Act on payment of 38750 pounds, 77500 pounds, 23250 pounds and 15500 pounds to M/s. Tate and Lyle Industries Ltd., London under the Technical Collaboration Agreement, dated 12.10.1983?”
1.1. As a matter of fact, we had recorded the same, after confabulationwith the counsels for parties, in our order dated 10.02.2011.
2. The question of law detailed out above arises in the background of the following facts as culled out from the orders of the authorities below:-
2.1 The assessee which is in the business of manufacture of sugar had entered into an agreement dated 12.10.1983 (in short ‘agreement’) for transfer of comprehensive technical information, know-how and supply of equipment with one Tate & Lyle Process Technology; a division of Tate & Lyle Industries Limited, London (hereinafter referred to as ‘Tate’).
2.2 The said agreement envisaged payment of a sum of £1,55,000 in four (4) instalments towards supply of documents concerning, what was known as “TALO processes”.
2.3 It appears that Tate being a pioneer in sugar technology; was not only engaged in the manufacture of specialized equipment but was also in possession of know-how required for installation and operation of specialized equipment, processes and use of essential specialty chemical products, which assisted in elimination of use of lime stone and hard coke while, greatly conserving energy bringing about reduction in pollution as well as loss of sugar during manufacture of plantation white sugar.
2.4 The assessee wanting to adopt the “TALO processes” for its factory at Daurala, in India entered into the aforementioned agreement.
2.5 The first, of the four (4) instalments, was to be remitted to Tate on the execution of the aforementioned agreement. Accordingly, the assessee, in its capacity as a representative assessee for Tate, applied to the Inspecting Assistant Commissioner (in short, ‘IAC’) for permission to remit the first instalment in the sum of £ 38750. The IAC accorded its no objection vide certificate dated 27.03.1984 albeit with a caveat that the assessee would have to deduct tax at source at the rate of 20% towards tax on the gross amount of remittance. Resultantly, the assessee could remit to Tate the amount only after deduction of tax at source. A similar no objection certificate was issued by the IAC vide its certificate dated 17.05.1984 in respect of the second remittance in the sum of £1,16,250.
2.6 It is pertinent to note that, in the two certificates issued by the IAC, no reasons were supplied as to why the assessee had been called upon to deduct tax at source at the rate of 20%.
2.7 The assessee being aggrieved by the said action of the IAC preferred an appeal to the Commissioner of Income Tax (Appeals) [in short, CIT(A)]. Several grounds were raised in the appeal by the assessee. The principle ground being that the remittance to Tate was not in the nature of royalty; the remittances in the hand of Tate constituted industrial or commercial profits and since Article VIII of the Double Taxation Avoidance Agreement (in short ‘DTAA’) obtaining between India and the United Kingdom was applicable, the said remittances could be taxed only if Tate was shown to have a permanent establishment in India.
2.8 In support of the aforesaid stand, it was argued that Tate had no permanent establishment in India. It appears, in this regard, a reference was made to a certificate dated 02.03.1984 to establish that Tate had no establishment in India in terms of Article V of the DTAA
2.9 The CIT(A), however, came to the conclusion that the remittances made to Tate by the assessee fell within the purview of the expression “payments of any kind” appearing in Article XIII (3) of the DTAA The CIT (A), however, accepted the position that the provisions of Section 9(1)(vi) of the Income Tax Act, 1961 (in short, ‘I.T. Act’) would be overridden in view of the provisions of Article XIII (3) of the DTAA. The CIT (A) was of the view that the term ‘technical know-how’ was wide enough to include not only outright sales of design or know-how but also any other provision of technical assistance. He also went on to hold that for a payment to be construed as royalty under the provisions of Article XIII(3) of the DTAA, it made little difference whether the payments made were lump-sum or, were made periodically or, even on a recurring basis. For these reasons, the CIT(A) concluded by holding that: “in the present case, it is clear that technical know how was provided by the foreign enterprise including lending of services of foreign technicians. The payment was clearly in the nature of royalty and it could not be said that payment had to be treated as commercial or industrial profits.”
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