1990-VIL-84-ITAT-

Equivalent Citation: ITD 036, 508,

Income Tax Appellate Tribunal BOMBAY

Date: 30.10.1990

INSPECTING ASSISTANT COMMISSIONER.

Vs

DAIMLER BENZ AG WEST GERMANY.

BENCH

Member(s)  : O. P. JAIN., R. P. GARG.

JUDGMENT

Garg, A.M. --- The appeal by the revenue and the cross objection by the assessee are against the order of the CIT(A), for the assessment year 1983-84.

2. The assessee is a non-resident company incorporated in the Federal Republic of Germany, hereinafter referred to as Daimler Benz. It had entered into an agreement on 16-1-1970 with M/s. Tata Engineering & Locomotive Company Limited ('Telco') whereby, under clause 2(a), the former licensed the latter to manufacture direct injection diesel engine, type OM 352 and spare parts thereof. Clause 2(b) widens the scope of the licence to manufacture any other products, namely, new complete models of Daimler-Benz commercial vehicles and/or parts thereof, on terms and conditions mutually agreed upon. Clause 3(a) defines the nature of licence. It provides--

" 3(a) Daimler-Benz undertake to furnish to Telco all technical information, drawings, designs, manufacturing data, test reports and other information available with Daimler-Benz (except such documents and information which Daimler-Benz are under an obligation not to divulge or communicate) which may reasonably be required by Telco for the manufacture, inspection, test and sale of the licensed products and undertake to authorize the use by Telco for the duration and purposes of the licence any patents and patent rights applicable to the licensed products. "

Clause 4(a) obliges Daimler-Benz to communicate to Telco promptly and freely all technical information relating to improvements in the licensed products, which, in the opinion of Daimler Benz are not having the effect of significantly altering the nature of the licensed products.

Clause 5(a) relates to the technical co-operation. It states that without affecting the provisions of Article 4 of the agreement and in order to impart technical know-how, working committees of Daimler Benz and Telco will discuss technical problems connected with the licensed products, so that Daimler-Benz may grant the necessary technical assistance and may advise Telco on the developments of the licensed products.

Clause 6(a) concerns personal assistance and training facilities. It provides that to the extent they are in a position to do so Daimler-Benz shall at the request of Telco and on terms and conditions to be mutually agreed make available technical personnel for service to Telco in India in an advisory capacity in the area of their specialisation.

Clause 7 provides for a report of Telco to sub-licence but with the approval of Daimler-Benz.

Clause 8 provides for the assistance to Telco on request to obtain the manufacturing and other licences to enable Telco to make components not manufactured by Daimler-Benz but purchases from other sources.

By clause 9, Daimler-Benz ensures itself for not being responsible for any infringement by Telco of third party's proprietary rights.

Clause 10 provides for the supply of parts and components required by Telco on reasonable price and conditions.

Clause 11 limits the territory of manufacture and sale of the products.

Clause 12 relating to royalty is to the following effect :

" 12(a) : In consideration of the information and assistance to be provided by Daimler-Benzas well as the other services to be rendered by Daimler-Benz, Telco shall pay to Daimler-Benz in five equal annual instalments commencing from the end of the first period of twelve months of commercial production of the OM 352 engine a royalty of Rs. 15,000,000 (Rupees fifteen million).

(b) : In respect of other licensed products the royalty shall be at such rate and on such terms as may be mutually agreed upon in each case.

(c) : The annual instalment of the royalty for the OM 352 engine shall be paid within sixty days of its becoming due to Daimler-Benz in Deutsche Mark in Germany or in the case of any delay in receiving the requisite Government approvals to the account of Daimler-Benz in India.

(d) : Any income-tax or other taxes payable in India on the income or royalty payable to Daimler-Benz under this Agreement shall be to the account of Daimler-Benz. "

Clause 13 provides for the limitation of Daimler-Benz's liability. By clause 14, Daimler-Benz prohibits Telco the use of its trade marks. It provides :

" 14(a) : Telco shall not make the products covered by this Agreement with Daimler-Benz trade marks. Furthermore, Telco will, in distribution, make no reference to the licence relationship with Daimler-Benz and will not engage in any advertising with the Daimler-Benz trade marks.

(b) : Telco shall to the best of its ability and without incurring any liability to Daimler-Benz for its failure to do so notify Daimler-Benz of any infringement or violation within the Union of India of the name, trade marks, or proprietary rights of Daimler-Benz which come to Telco's knowledge or attention. "

Clause 15 appoints Telco as Daimler-Benz's sole selling agents for all the products in India for five years on usual terms.

Clause 16 relates to representation for Daimler-Benz on Telco's Board and disposal of Daimler-Benz shareholding. It reads as under :

" Tata shall to the best of its ability arrange for the appointment of one representative of Daimler-Benz on the Board of Directors of Telco from time to time so long as Daimler-Benz continue to hold not less than 2.5% of the equity capital of Telco. "

Clause 17 obliges Telco to inform Daimler-Benz, in advance of any licences in the field of commercial vehicles or major parts thereof which the former intends to take from other companies.

Clause 18(a) states that the agreement shall be deemed to have come into force from 1st April, 1969 and will operate in the case of OM 352 engine for a period of five years, or for such periods as may be mutually agreed upon. Sub-cl.(b) thereof states :

" Notwithstanding the termination of the licence agreement for the manufacture of OM 352 engine, royalty will remain payable in accordance with Article 12 hereof, technical information relating to improvements in the licensed products shall be made available in accordance with Article 4 hereof and restrictions on the manufacture of the licensed products outside the Indian Union will continue to remain in force in accordance with Article 11 hereof. "

3. The assessee claimed the receipt of one instalment of Rs. 39 lakhs under clause 12 to be exempt on the ground that it had no permanent establishment in India and the receipt was industrial and commercial profit and, therefore, exempt under Art. III of the Double Taxation Avoidance Agreement ('DTAA') between India and Federal Republic of Germany. The Assessing Officer (AO) did not agree. According to him, it was firstly not in pursuance of the agreement entered before 1-4-1976, as the agreement dated 16-1-1970 expired in 1974 and consequently, the receipt was royalty in nature and stood excluded from the term " industrial or commercial profits' by clause 3 of Art. III of DTAA. The CIT(A) rejected the contention of the assessee that the entire amount of receipt was industrial or commercial profits. He observed that under Art. III(3) of DTAA, income received by way of rents, royalties, interest, dividend, management charges, remuneration for labour and personal services had to be treated as not in the nature of industrial and commercial profits. He held that under Article 5 of the Agreement, the assessee and Telco were to discuss technical problems connected with the manufacture of the licensed product and such meetings were to be held periodically for imparting of technical assistance and advice to the Indian company. These services, according to him, could be considered as services of a personal nature. He further held that similarly, under Article 6, the assessee-company, at the request of Telco, was to make available the technical personnel for services in India in an advisory capacity in the area of their specialisation and the assessee-company was also to licence Telco in the manufacture of direct injection diesel engines. The payment in regard to all these services, according to the CIT(A), could not be considered as commercial and industrial profits. He held that such amounts, as they arose to the assessee in India, would have to be taxed and since no separate payment was contemplated, according to him, an apportionment of the same was called for. He referred in this connection, to the decision of the Supreme Court in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 wherein it was held that in case of a business of which all the operations were not carried out in India some part of the income should be deemed to accrue in India through and from the business connection and such part should be the part which could reasonably be attributable to the operations carried out in the taxable territories. Having regard to all the terms and conditions of the agreement, the CIT(A) held that fifty per cent of the payment made to the assessee during the year should reasonably be considered as attributable to the operations carried out in India and such income shall be brought to tax as the income arising to the assessee from its business operations carried on in India. Both the parties are aggrieved by the said order of the CIT(A).

4. We have heard the parties and considered their rival submissions. The receipt by the assessee are in pursuance to the agreement dated 16-1-1970. The period of five years, as provided in clause 11 is from the end of the first period of 12 months of commercial production of OM 352 engine and not from the date of agreement. The AO was not, therefore, right in stating that the agreement expired in 1974 and that the receipts were not from an agreement entered prior to 1-4-1976.

5. The receipt of the lump sum in this case, as stated in clause 12(a), are in consideration of the information and assistance to be provided by Daimler-Benz as well as other services rendered by them. This is besides the royalty for other licensed products. Personal assistance and training facilities are subject to separate terms and conditions and, therefore, no part of the services could be attributable to that. The normal expenditure in imparting the technical co-operation through discussion of technical problems are to be borne by Telco. This too is to impart technical know-how and no other purpose. The fees relating to that shall be royalty in nature. The provision relating to grant of licence (cl.2), as explained in cl.3, and the provision relating to technical improvements in clause 4 would be in the nature of imparting technical know-how any receipt as consideration thereof would obviously be a royalty receipt. There would arise no question of determination that a part of the operations were outside India and, therefore, the fee relating thereto would not be taxable. The know-how is exploited in India and the licence to manufacture is used in India and, therefore, the entire income would accrue in India. Neither it was the case of the assessee, nor we find any recital in the agreement nor any evidence suggesting that the know-how was transferred outside India, or that any information was imparted outside India. It would, therefore, in our opinion, be taxable in India.

6. Art. III only excludes that income of the non-resident, which was in the nature of industrial or commercial profits, other than those excluded by cl.3 thereto. Royalty is one of the items excluded. In this view of the matter, the receipt of the assessee being royalty in nature would not be exempt under Art. III. For the purposes of DTAA, one has to go by the general meaning of the term 'royalty' in view of the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.) and not by the definition as contained in Explanation 2 to section 9(1)(vi). The general meaning of royalty, in the opinion of the Special Bench, is as stated in paragraph 45 of the order, after considering the Calcutta High Court decision in CIT v. Stanton & Stavely (Overseas) Ltd. [1984] 146 ITR 405, its definition meaning given in Encyclopaedia Britannica (1972 Edition) and Gujarat High Court decision in CIT v. Ahmedabad Mfg. & Calico Printing Co. [1983] 139 ITR 806 and others, as under :

" It is thus clear that the general concept of the term 'royalty' does not rule out 'lump sum payments' being considered as 'royalty' as well as payments made for know-how. The mere fact that a particular knowledge which is imparted may not be statutorily protected as in the case of a patent or trade mark would not take it outside the purview of the term 'royalty'. It may be that the knowledge imparted is only contractually protected. It may even be that there is no protection for the knowledge so granted. Even so the observations which we have set out above clearly show that the form of legal protection has no conclusive impact in determining whether paymentis 'royalty' or not, nor the nature and mode of payment whether lump sum, single, or periodic, nor the question that it does not cover know-how. The dictionary meanings of the term 'royalty' relied on by the learned counsel for the assessee and adverted to in paragraph 18 of our order are only indicative of circumstances to which payments can be considered to be royalty and are not exhaustive as to the content of the term. "

Looked at with the aforesaid, the receipts of the assessee, in our opinion, fall in this definition of royalty and that being so, they are not exempt under Art. III of the DTAA.

7. Once it is found that the amount is not exempt under Art. III of the DTAA and there is no specific provision for assessment of such a receipt in DTAA, the application of treaty comes to an end. Thereafter, one has to refer to the provisions of the Income-tax Act to assess the receipt. Art. XVI of DTAA also stated to in its clause (1), i.e. " The laws in either of the territories will continue to govern the assessment and taxation of income in the respective territory except where express provision of the country is made in this Agreement (DTAA). " Section 9(1)(vi) of the Income-tax Act provides for the assessment of royalty in India, if it was paid by the Government, or by a resident in India, except where it was used in a business outside India, or even paid by the non-resident if it was used in a business in India, or for earning or making income from any source in India. The payment was made by Telco, a resident company in India and the technical know-how was used or services utilised in a business carried on by Telco in India. It was, therefore, fully taxable in India. No such requirement is there is section 9(1)(vi) to bifurcate the receipts on the basis of operations within or outside India and then taking a view that only that part of the receipt would be taxable, which had relation to the operations in India. Here we have to go by the definition of 'royalty' given in Explanation 2 to section 9(1)(vi) of the Act, as we are dealing with an assessment after 1-4-1976. The definition reads that : For the purposes of this clause, 'royalty' means consideration including any lump sum consideration, and, therefore, the receipt in question, in our opinion, is royalty in nature. For all the above, we reverse the order of the first appellate authority and restore that of the AO.

8. In the result, the departmental appeal is allowed and the cross objections stand rejected

 

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