IN THE ITAT MUMBAI BENCH ‘L’
Bajaj Holdings & Investments Ltd.
Additional Director of Income-tax (International Taxation)
IT Appeal NO. 7237 (MUM.) OF 2008
JANUARY 16, 2013
Rajendra, Accountant Member – The present appeal is filed against the Order dt. 08-08-2008 of CIT(A)-XXXIII, Mumbai. Following Grounds of Appeal have been raised by the Appellant:
“On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding that payment made by the assessee to Xennia Technology Ltd. amounting to British Sterling Pound 25,000 is in nature of royalty I fees for technical services and accordingly is liable for deduction of tax at source at the rate of 15%.
2. The assessee hereby reserves the right to add to, alter or amplify the above ground of appeal reserves the right to add to, altar, or amplify the above ground of appeal.”
Additional Ground of Appeal filed by the assessee reads as under:
“1. Without prejudice to the main ground of appeal, the assessee submits that the Assistant Director of Income-tax erred in directing the assessee to deduct tax at source on fees for technical services @ 15% against the correct rate of 10% as prescribed in section 115A(1)(b)(BB).”
2. Assessee-company, engaged in the business of manufacturing of two and three wheelers, filed an application dated 04-02-2008 u/s.195 of the Income-tax Act,1961 (Act) requesting the Assessing Officer (AO) to issue a no objection certificate for making payment of 25,000 British Sterling Pound to Xennia Technology Limited (Xennia), a company based in United Kingdom, without any deduction of tax. As per the material available on the file the assessee had entered into an agreement dated 25.11.2007 with Xennia for developing inkjet printers and four specific inks for the purpose of printing directly on two opposite sides of painted metallic petrol tank. The printer as per the specification of Bajaj Auto Ltd. (Bajaj) were to be developed at Xennia and thereafter were to be shipped to India for commissioning at Bajaj plant in India. As per the agreement Bajaj was required to make payment of 25,000 British Sterling Pound being start up fees to procuring inkjet printing solution. Later on one more agreement was signed by both the parties. After considering the submissions of the assessee and the agreement, AO held that technical design and drawing and Plans were also being made available by Xennia, that payment was in the nature of fees for technical services, that same was to be taxed at 15% of the gross amount in terms of clause 2 Article 13 of the DTAA between India and UK.
3. Assessee preferred an appeal before the First Appellate Authority (FAA). After considering the Assessment order and the submissions of the assessee he held that the assessee had utilised the technical services of the Xenia for the development of a technical plan/design for a sophisticated printer, that it had also utilised the technical services of Xennia to develop four different inks, that the assessee was specifically charged by Xennia for the technical services rendered with regard to designing the printer, that manufacturing cost of the printer was separately paid, that 25,000 British Sterling Pound were paid only for the technical services, that intellectual property developed from the technical services (intellectual right over the design of the printer) was owned by the assessee, that the contract was not only for purchase of machinery and it was also for acquiring the technology from Xennia by the assessee. Considering the above he finally held that the agreement was for using the technical know-how of Xennia, that it was for services of a technical nature consisting of the development and transfer of a technical design, that the payment came under the purview of royalty/fees for technical services as contemplated u/s. 9(1)(vi) read with Explanation 2(i)(ii)&(vi) to section 9(1)(vi) and 9(1 )(vii) of the Act and Article 13(4)(c) of the India-UK Treaty. With regard to the cases relied upon by the appellant-company [1. CIT v. Neyveli Lignite Corpn. Ltd.  243 ITR 459, 2. CIT v. Mitsui Engg. & Ship Building Co. Ltd.  259 ITR 248, 3. CIT v. Klayman Porcelains Ltd.  229 ITR 735 he held that in those cases there was a finding to the effect that there was no transfer of licence or any patent invention, model or design, that the payees were not in a position to exploit the patent or design, that in the case under consideration it was clearly mentioned that the intellectual property would pass on to the assessee, that the cases relied by the assessee were distinguishable on facts.
3.1 Before us, Authorised Representative (AR) submitted that assessee had purchased printer only, that it had not used the technology, that supplier of the machine was not having PE in India, that nothing was made available to the assessee, that the purpose of the agreement was to prevent the supplier from supplying the same machinery in India, that supplier was allowed to use the formula outside India by the appellant, that payment was for entire procedure, that even if there was use of Intellectual Property it existed at the end of the project, that the project has three phases.
3.1.1 With reference to the additional ground, it was submitted that even if tax was to be deducted, it should be deducted @ 10% and not at 15% from the provisions of Section 115 A of the Act.
3.2 Departmental Representative (DR) submitted that the entire agreement was for Fees for Technical Services (FTS),that services were made available by the supplier to the assessee, that the revised agreement proved that product specified by the assessee was prepared by the supplier, that it was not a purchase simplicitor, that technical knowledge was made available to the assessee, that it was ‘proprietary’ information, that termination clause proved that assessee had exclusive right over the product of the assessee. With reference to additional ground, DR submitted that same was not applicable, that the transaction was covered by Article 13 of the Indo-UK Treaty and not by 115A of the Act.
4-5. We have heard the rival submissions and perused the material before us. The basic question to be answered by us is whether the agreement entered into by the assessee and Xennia was about purchase for machinery only or it dealt with something more than that ? After going through the agreement, we are of the opinion that it was not about purchase of printer alone. Assessee-company had purchased a particular technology form the Xennia. Under the head ‘Terms of business’ in para 8.6 to 8.9. Both the parties had agreed as under:
8.6 “Subject to payment of all outstanding amounts owed to Xennia by tile client, the client will exclusively own the IP developed by Xennia arising from or related to the services (“Foreground IP”) This shall include whole and irrevocable rights by the client to file patent application, design application or any such application for intellectual property rights arising out of foreground IP. The client will grant to Xennia a world-wide, royalty free, irrvocable, transferable, non exclusive licence to use foreground IP outside of the client field. Client field is defined as inkjet decoration for 2 wheelers.
8.7 In the event that, for whatever reason, the Client does not wish to maintain the Foreground IP the client shall notify Xennia and offer to transfer the Foreground IP to Xennia or terms to be agreed between the parties.
8.8 Xennia warrants that the IP licensed by Xennia to the client in the course of the services does not infringe the rights of any third parties. In addition will not undertake any assignment for any company in the world unless the party agrees not to introduce this technology/products employing this technology.
8.9 Xennia warrants that it shall not undertake any assignment from any India Company engaged in manufacture and sale of two wheelers, three wheelers or four wheelers for a period of 36 months from the date of completion of services covered by this Contract.”
5.1 In our opinion, above referred terms of the agreement clearly prove that Xennia had supplied the technology to the assessee. Not only the assessee was using it, it had the right over the Intellectual Property also. Agreement entered in to by the assessee-company allowed it ‘to file patent application, design application or any such application for intellectual property rights arising out of foreground IP’. In these circumstances, we agree with the FAA that the transaction was not for sale of printer only-it included the technology also. When a particular technology was made available to the assessee by Xennia exclusively, it cannot be said that the agreement was only for sale of printer. Therefore, upholding the order of the FAA, effective Ground of appeal i.e. Ground No.1 decided against the assessee.
5.2 As far as Additional Ground is concerned, we have perused the provisions of the Act to be covered u/s. 115A(1)(b)(BB). As per the said provisions, tax on dividends, royalty and technical service fees in case of foreign companies has to be computed in a particular manner, if it is entered in to after a particular date. We find that neither the AO nor the FAA had any occasion to deal with the issue. Assessee had also not raised it before the FAA. So, in the interest of justice we restore this issue to the file of the AO for the limited purpose of deciding the question of applicability of lower rate of tax for the transaction-in-question.
Additional Ground raised by the assessee-company is decided in its favour in part.
As a result, appeal filed by the assessee stands partly allowed.