1990-VIL-96-ITAT-DEL

Equivalent Citation: ITD 035, 304,

Income Tax Appellate Tribunal DELHI

Date: 18.07.1990

INCOME-TAX OFFICER.

Vs

MUNAK GALVA SHEETS LIMITED.

BENCH

Member(s)  : K. S. VISHWANATHAN., Y. R. MEENA.

JUDGMENT

Per K.S. Vishwanathan, Vice President --- This is an appeal by the Department against the order of the CIT (Appeals) holding that no tax need be deducted under section 195(2) on the remittances to be made to a foreign company.

2. The assessee is a Ltd. Company and they had entered into a tripartite agreement with Metallurgical and Engineering Consultants (India) (MECON) and CLECIM, a company incorporated in France on 19th September 1985. The preamble of the agreement describes the assessee as the purchaser, MECON as the principal contractor and CLECIM as foreign contractor. The assessee had an obligation for establishing a continuous galvanising line of 35,000 tonnes per year. MECON and CLECIM were to design and supply the technology developed in France which is the exclusive property of CLECIM. MECON and CLECIM would provide plant, design and engineering services. They would manufacture, deliver and supervise the erection and commissioning and conduct performance guarantee test on the plant. CLECIM would be responsible for the supply of design and engineering, supply of FOB equipments. Art. 3 gives the scope of supplies and service to be done by CLECIM. Art. 3.3.6 says that the " design and engineering including documentations to be supplied by foreign contractor including major foreign subcontractor shall be delivered in France and shall be received by Principal Contractor/Purchasers Engineer deputed to CLECIM office in France or at the request of the purchaser delivered on FOB port of Shipment basis or sent by first class airmail/air--freight at foreign contractor's cost." It would be seen from this Article that designs and documentations would be received in France by the engineers of the assessee deputed for that purpose.

3. Both MECON and CLECIM should provide supervisory service for erection and commissioning and, while NECON should provide Indian supervisory services for 900 man-days, CLECIM should provide services partly for erection and fully for commissioning of works. For this purpose, the foreign supervisory personnel of CLECIM could be deputed for a ceiling of 450 man-days. The assistance for this purpose should be at the site.

4. Article 4 gives the contract prices. Artice 4.1.1.(ii) provided that the assessee would pay 9.285M French Francs for imported equipment and US $105,000 for component parts. In respect of supply of services, design and engineering including cost of supply of documentation, a payment of FRF 7.015m. would be payable. For the foreign supervision of erection, a further payment of 675,000 FRF will be made. Article 6 contains the terms of payment. Article 7 deals with the taxes and dues. Article 8 deals with the delivery of the plant and machinery. There are other usual conditions regarding inspection, testing, fairs etc.

5. After a part of this contract had been implemented, the assessee had to make certain payments as per this agreement to CLECIM. Particularly, 10% of 7.015 FRF fell due. The instalment to be paid in terms of Indian rupees was Rs. 11,29,415. The assessee approached the ITO for a no objection certificate for the remittance of this amount. Another application dated 10-5-1986, the assessee gave the particulars of the colloboration agreement. The ITO, after considering the provisions of the agreement, was of the view that the payment to be made amounted to royalty under Explanation 2 to section 9(1)(vi). Therefore, the assessee would be required to deduct tax at the rate of 30%. This order was passed on 10-7-1986. The assessee made the payment as required by the ITO on 13-8-1986. However, they disputed their liability to deduct tax and file appeal before the CIT(Appeals).

6. The CIT(Appeals), after considering the provisions in the agreement and also the provisions of Double-taxation Agreement between India and France, came to a finding that no part of this payment would be subject to Indian Income-tax.

7. The Department is in appeal. A preliminary objection was taken by the department that the order was not appealable at all. The ITO has passed an order directing deduction of tax under section 195(2). This is not an appealable section. We do not find any merit in this submission. Section 248 has clearly provided for filing of an appeal in respect of a direction for deduction of tax. It was then submitted that the payments are in the nature of royalty. The provisions of section 9(1)(vi) would be clearly applicable. Even in respect of the agreement with France to avoid double taxation, there is a provision for taxing royalty. Shri Tandon, for the Department, referred to Article VII of the DTA agreement which states that royalties derived by a resident of one of the contracting States from sources in the other contracting State may be taxed in both the contracting States. He further pointed out that the term " Royalties " defined in Article VII(2) means the payment of any kind received as consideration for the use of or for the right to use any copy-rights of literary, artistic or scientific work, design, plans, script, processes or formula or for the use of industrial, commercial, scientific equipment or for information concerning industrial, commercial or scientific experience. Thus, he submitted that the definition is very wide and can include the documentation and designs for which the assessee is to make the payment. Shri Tandan then submitted that the CIT(Appeals) had treated the subject-matter as if it was an appeal by the French Company itself. He had misconceived the scope of the appeal. The only issue before him was, whether, prima facie, tax has to be deducted at source or not. That does not mean that the liability has to be finally adjudicated. He took exception to the Commissioner's remark that " in the absence of any materials, he would hold that the services were rendered in France ". He pointed out that it is not an assessment order and the ITO has not been called upon to substantiate the case with materials.

8. Shri Ganesan, for the assessee, submitted that the payment in dispute is merely for the designs and documentation of the machinery and plant which is to be eracted. Referring to Article 1, he submitted that, under the agreement, the documents would be handed over to the engineers of the assessee-company in France only. Thus, the service was rendered in France which is outside India. With reference to the submission that the payments are in the nature of royalty, Shri Ganesan referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146, and submitted that the payment, as per the ratio given in that decision, could not be considered as royalty. He made a reference to the decision of the Madhya Pradesh High Court in the case of Hindusthan Electrographites Ltd. v. IAC [1984] 145 ITR 84. In that case, the assessee had entered into an agreement with a French Company for installing a new design of furnaces. The French Company was to provide the design and drawings of the furnace. The payment to be made for this was treated as royalty by the Department. The High Court held that the services rendered by the French Company was to modify the furnaces to make them workable and the charges for this could not be termed as royalty within the meaning of Article VII of the agreement with France for avoidance of double taxation. Therefore, he submitted that there is an authoritative decision on these Articles in the DTA agreement. So the payment cannot be treated as royalty.

9. Shri Tandan, for the Department, submitted that it would not be correct to consider the payment piece-meal. AU the payments to be made by the assessee to the French Company must be considered together. If that was done, it will be clear that the assessee had rendered services and income accrues and arises in India, which will be taxable even under the DTA agreement.

10. We have considered the submissions of both the sides. Although Shri Tandon, for the Department, submitted that this was not an appeal by the non-resident company and the scope was very limited i.e., whether the tax is to be deducted at source, even then we feel that the real issue is, whether the French Company has any income accruing or deemed to accrue in India. Therefore, it is very necessary to consider all the aspects of the case, as if the French Company itself is in appeal.

11. The assessee, as a matter of fact, is the French Company and since there is an agreement in existence between India and France for avoidance of the double taxation, it is necessary first of all to see, whether any income accruing or arising to the French Company can be brought to tax. As per Article 3 of this Agreement, the industrial or commercial profits or an enterprise of one of the Contracting States would not be subject to tax in the other Contracting State unless the enterprise has a permanent establishment situated in the other Contracting State. It is undisputed that CLECIM, the French Company, does not have a permanent establishment in India. Therefore, the industrial or commercial profits cannot be brought to tax. The term " Industrial and commercial profits " however, is defined in Article III(5). It says that the industrial and commercial profits would not include income in the form of dividends, interest, rent, royalty and similar payments which are referred to in Art. VII Paragraph 2. It would be noticed that the term excludes royalties and similar payments. Article VII defines royalties. It reads as under :

" Art. VII(1) Royalties derived by a resident of one of the Contracting States from sources in the other Contracting State may be taxed in both the Contracting States.

(2) In this Article, the term ' royalties ' means payments of any kind received as consideration for the use of, or for the right to use, any copyrights of literary, artistic or scientific works, cinematographic films, patents, models, designs, plans, secret processes or formulae, trade marks or for the use of or for the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience, but does not include any royalty or similar payments in respect of the operation of mines, quarries, or other places of extracting of natural resources."

12. It would be interesting to notice that the definition of royalty, as given in section 9(1)(vi) of the Income-tax Act, more or less coincides with the definition of royalty under the Double Taxation Agreement. In this case, we are not concerned with the payment made for the use of any copy right, cinematography, film, patents, models, secret process or formula, trade marks etc. As we will see later, they do not arise from the facts of this case. We are also not called upon the consider, whether any payment is made for the use of an industrial, commercial or scientific equipment. However, we have to decide, whether any payment is made for the information concerning industrial, commercial or scientific experience.

13. This would require us to go into the facts once again to find out, whether any such payment is made for information. To recapitulate, the assessee, i.e., the person who has to make remittance to France, is a company and this company proposed to establish a continuous galvanising line of 35,000 tonnes capacity and for this purpose, they had entered into a contract with MECON who is the principal contractor and CLECIM, the French Company, which is a foreign contractor. It should be noted that the assessee, i.e., Munak Galva Sheets Ltd. is termed as the purchaser and the contract is for design, engineering, manufacture, delivery, supervision of erection and commissioning of this plant of Continuous Galvanising Line -- the contractors MECON and CLECIM are entirely responsible for putting up this plant. The process of putting up the plant has several steps and the agreement deals with each step and fixes responsibility thereof. Article 2, therefore, specifies the design and technology. Article 3 says that what is the scope of the service and equipment. Design is for the plant to be erected and the equipment would go into the erection of the plant. As part of the design for the plant, CLECIM has to furnish the documentation. These documentations were to be delivered in France to the principal contractor, i.e., MECON and not the assessee. No doubt, MECON would take delivery of these designs and documentations at the request of the assessee. But what is to be noticed is that the interest of the Indian Company is not in acquiring any documents for its own sake. They are not even given to them. It would be delivered to MECON as part of the process for setting up of the plant.

14. Article 4.1.2 deals with the contract price for the design and engineering including documentation. The payment we are concerned with, is a payment for this documentation. On a common sense approach, it would appear to us to be merely purchase of certain designs and documentations which is to be used in the erection of the plant. As far as the Indian Company is concerned, this goes into the cost of erection of the plant. As far as the French Company is concerned, there is no doubt it all that this would represent a trading receipt. They have specialised and have expertise in preparation of such documentation and the transfer of these documentations for a price, is a trading activity.

15. The question now is, whether this transfer of documentation could be considered as payment for information concerning industrial, commercial or scientific experience. We have, however, doubts regarding the expression "experience" used in the Agreement. We first thought that it would be equivalent to experiment because of the word " scientific " preceding it. But the word " experience " covers not only the word " scientific " but also " industrial or commercial ". So, in order to give a meaning to this word, we have to construe the whole phrase harmoniously. Therefore, the information should be regarding industrial experience, commercial experience or scientific experience. It would appear to be the knowledge arising out of years of operation in the industrial, commercial and scientific field. Looked at from this angle, it would appear to us that the documentations referred to, is ' information ' distilled by the French Company from years of industrial experience. Therefore, it would appear to us that the term " royalties " as per Article VII would include payment for documentations, provided the documentations arise from years of experience of the French Company in the industrial, commercial and scientific field.

16. Since these were royalties, even under the agreement between India and France and there is no bar in Art. III for taxing such royalties even if there is no permanent establishment in India, it would appear to us that the department is justified in treating this receipt as taxable in India.

17. We would now consider the reasons which found favour with the CIT(Appeals). The CIT(Appeals) had stated that, in the order directing deduction of tax, the agreement for avoidance of double taxation has been overlooked. It may be that the assessing officer may not have referred to the Agreement, but as shown above, on a consideration of the provisions of the Agreement, there is a case to hold that the payments are revenue receipts taxable in India. The CIT(Appeals) has further given a finding that the information to be supplied was not such that can be used repetitively. Perhaps the requirement of repetitive use is expected in the grammatical meaning of the word " royalty ". But when Article VII(2) defines royalty, in our opinion, it is not necessary to see, whether it is repetitive. What is to be seen, is whether any payment has been made for " information" gathered by the French Company in industrial, commercial or scientific experience over the years. As a fact, we have found it to be so. The CIT(Appeals) also had stated that the payments covered a number of services. We may state here that, at present, we are only concerned with the payment made for the transfer of documents. There are certainly other services rendered. But separate payments are to be made for these services. That issue has not come before him except in over-all context, which we discuss later below. So, for the payment for documentation, these were not relevant.

18. We would now consider the submissions made by Shri Ganesan. These submissions are also relevant for considering, whether, under the Income-tax Act, any income accrues or arises in India. The discussion in the above paragraphs is only for the limited purpose of finding out, whether the Indo-French Agreement could allow Indian taxing authorities to consider such payments for taxation. We have found that there is no bar under the agreement for considering the issue. Even then, we will have to consider, whether, under the Income-tax Act, these payments could be brought to tax as income accruing or arising in India. The case of the Department rests entirely on section 9(1)(vi) which deems certain payments as income by way of royalty. Here also, the expression " royalty " has been defined in Explanation 2. Under clause (iv), a payment for the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill, would be royalty, deemed to accrue or arise in India. We have already considered and found that there was a payment for imparting information concerning industrial, commercial or scientific experience. Here, in clause (iv), one additional expression is used, i.e., ' technical '. But this does not make any difference because, as far as the information is concerned, which arises from an industrial experience, it might take into account information from technical experience, also. Therefore, under the extended definition given in Explanation 2, the payment could be deemed as royalty and, therefore, taxable.

19. In view of this finding, the first objection of Shri Ganesan, i.e., the documents were handed over in France, is not relevant. The imparting of information is enough to attract the section. It is irrelevant to consider the place where the information was imparted. That would be relevant only for the situs of accrual of income befo re the amendment brought in 1976. After the introduction of clause (vi) that has become irrelevant.

20. The decision of the Andhra Pradesh High Court in the case of Visakhapatnam Port Trust, the issue was different and does not really help the assessee. In that case, the Andhra Pradesh High Court was considering the Double Taxation Avoidance Agreement with Germany. There appears to be no provision in the German Agreement which contain an extended definition of ' royalty ' as in the case of Indo-French Agreement. At any rate, the Andhra Pradesh High Court has not referred to that. They had, no doubt, referred to Article II, which gives the definitions, Article III, which refers to the requirement of permanent establishment before profit could be taxed in India and Article VIII. Therefore, the finding given therein would not be relevant for understanding the Agreement between India and France. Apart from that, the High Court was mainly considering, whether there was a business connection under section 9(1)(i) of the Income-tax Act. That issue does not arise here. They further found that there was no permanent establishment. Ultimately, they found that the income was industrial or commercial income of the foreign enterprise and since there was no permanent establishment, it could not be brought to tax.

21. The second decision relied upon was that of Madhya Pradesh High Court in the case of Hindusthan Electrographites Ltd. This is also distinguishable on facts. In that case, the Indian Company wanted to adopt the improved technique by a foreign company, known as SERS. Since the furnace of the Indian Company was different detailed engineering was required to be carried out before SERS could draw modified designs suited to the assessee-company. For this, they required a payment of Rs. 1 lakh French Francs. For periodical testing, they required another 25,000 French Francs. It is these payments which came for discussion before the High Court. The High Court found at page 89 that the payment was " not as consideration for the use of its patents or for information or knowhow, but for such technical or professional services which were necessary to enable the petitioner to adopt the modified design in the existing furnaces used by the petitioner ". On these facts, they gave a further finding that this technical advice was necessary for enabling the assessee to modify its furnaces, so as to make them workable under the patents and knowhow made available to the petitioner by the French Company. Therefore, the High Court held that the transaction did not fall within Article VII of the Indo-French Agreement. Factually, therefore, the position in that case is different. So this case also does not help the assessee.

22. We may also refer to the decision of the Special Bench of the Tribunal in Siemens Aktiengesellschaft v. ITO [1987] 22 ITD 87 (Bom.). That decision is remarkable for the reference to various authorities on the meaning of the expression " royalty ". Several agreements which the assessee foreign company had entered into with Indian Companies were discussed and they have held that payments for documentation prepared and transmitted could also be considered as royalty.

23. We may now take up another argument, which require us to consider the entire agreement as a whole and decide, whether the payments made under various Articles could be considered as taxable receipts deemed to accrue or arise in India. As we have stated earlier, the Indian Company had entered into an agreement for putting up galvanising plant. As far as the Indian Company is concerned, there is one transaction, i.e., putting up a plant. But, as stated earlier, in this process, several steps have to be taken. One step is to get the designs of the plant for erection. The second step is, acquiring the machinery and equipments, third step is getting the technical assistance for the erection, 4th step is the training of the personnel in respect of the product manufactured. All these are part of the plant. In respect of these, there could be several contracts. There could be a contact for supply of documentation and another for purchase of machinery. Merely because all these activities are mentioned in one agreement, it does not follow that there is one integrated contract which cannot be separable. We find that the contract stipulated different types of services, different types of payments and different time-schedule are drawn-up. Therefore, it is possible for us to consider the payment for the documentation separately from the rest of the payment.

24. Under these circumstances, we would allow the Departmental appeal and restore the order of the Income-tax Officer.

25. The appeal is allowed

 

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