Outright purchase of plant know-how in the form of technical / engineering data, design, drawings is not royalty subject to withholding taxes

Himachal Pradesh High Court holds that Outright purchase of plant knowhow in the form of technical / engineering data, design, drawings etc. is not royalty / fee for technical service, subject to withholding taxes.

The Assessee company is in the business of manufacturing audio magnetic sound heads used in a variety of audio systems. It entered into an agreement with a Singapore Company (M/s Sankyo Seiki Pvt Ltd.) for supply of plant knowhow and product knowhow. Supply of plant knowhow includes delivery of technical and engineering data, design, drawings, sketches and photographs.

The agreement was entered into in Singapore. The agreement is valid for a period of five years after which the data and technical knowhow would remain the property of assessee company for full and free use.

The agreement also provides for the foreign company making available services of technicians, if required, for setting up the plant and machinery. However, no such services were required and made available.

The assessee applied for No Objection Certificate (NOC) for remittance of amounts to the foreign company without deduction of tax at source on the ground that no income had accrued in India. NOC was denied by the Assessing Officer (AO) holding the same as fee for technical services under the Income Tax Act, 1961 (“the Act”).

The Commissioner of Income–tax (Appeals) (CIT(A)) allowed assessee’s claim and directed the AO to issue the NOC. On appeal by revenue, the Appellate Tribunal upheld the decision of the CIT(A) and held that the payments related to acquisition of plant knowhow outside India and no income of the foreign company arose in India. The Appellate Tribunal further held that the payments were also outside the ambit of the extended definition of royalty under the Act.

The revenue, thereafter, filed an appeal before the High Court.

Contentions of the Revenue

• The assessee had purchased the rights to utilize the rights in respect of a patent, invention, model etc owned by the foreign company. Payments towards the above would constitute royalty under the Act.
• The payment could also be construed as fee for technical services as the agreement provided for services of technicians, if required.
• Since the income by way of royalty / fee for technical services was paid by a resident of India it was liable to tax in India.

Contentions of the Assessee

• The assessee company has purchased plant knowhow which falls within the definition of “plant”.
• The purchase was made in Singapore and the payment is not income of the foreign company under the Act on which tax could be deducted at source.

Ruling of the High Court

• The High Court referred to more facts of the case. Two directors of the assessee company visited Singapore for purchase of plant knowhow and collected technical documents from the Singapore Company.
• There can be no dispute that even drawings, designs, processing data etc. constitute plant within the meaning of the Income Tax Act.
• Reliance was placed on Calcutta High Court ruling in the case of ITO and Others vs. Sriram Bearings Ltd1 (also upheld by the Supreme Court in 224 ITR 724) wherein it was held that in an agreement for sale of trade secrets by a foreign company to an Indian company, no activity being carried out in India, the income cannot be construed as having been earned in India.
• The documents stood transferred to assessee company, it became the owner and could use the same for any period albeit after a period of five years.
• Although the agreement provided for making available technical services, no such technical assistance was ever required or provided.
• The foreign company has no business / plant in India.
• The transaction took place in Singapore and the agreement was entered into in Singapore. The documents were handed over to the assessee company’s representatives in Singapore
• The transaction is of outright purchase of plant knowhow and is not a case of transfer of interest.

Conclusion

The High Court held that the payment to the Singapore Company was towards purchase of the plant and not towards royalty since the title in the documents was transferred to the assessee company outside India for its full and free use.