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
Contentions of the Assessee
Ruling of the High Court
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.