Chitra Venkataraman, J.:— Tax Case (Appeal) Nos. 1187, 1307 and 1342 of 2005, 34 of 2006 and 743 of 2007 are filed by the assessee, relating to the asst. yrs. 1993-94, 1991-92, 1992-93, 1995-96 and 1994-95 respectively and Tax Case (Appeal) Nos. 1450 to 1454 of 2005 are filed by the Revenue, relating to the asst. yrs. 1991-92 to 1995-96 respectively.
2. The following are the substantial questions of law raised in the assessee's appeal:
“(i) Whether the Tribunal was right in law in holding that the fees for technical services is taxable in India under s. 9(1)(vii) and not exempt under DTAA.
(ii) Whether the Tribunal was right in law in holding that the consideration received by the appellant under the DTAA is to be assessed as royalty and not as business profits ?”
3. The following are the substantial questions of law raised in the assessee's appeal:
“(i) Whether in the facts and circumstances of the case, the Tribunal was right in deciding the issue without considering whether the assessee had satisfied the condition of carrying on a business in India ?
(ii) Whether on the facts and circumstances of the case, the entire receipts of the assessee from its collaborator in India only be taxed as ‘royalty’ ?”
4. The assessee herein is a non-resident company of Thailand. It entered into technical assistance know-how agreement on 19th March, 1990 with M/s. Mohan Breweries & Distilleries Ltd. (MBDL). A reading of the agreement dt. 19th March, 1990 shows that M/s. MBDL decided to establish a container glass plant in the Union Territory of Pondicherry in India, and accordingly MBDL entered into an agreement with the assessee herein for transfer of glass technology know-how. Thus, the agreement herein speaks about transfer of know-how relating to engineering, design equipment procurement, operating and manufacturing technology for facilities for the manufacture of glass packing materials and containers. Article I of the agreement states that the assessee agreed to transfer the know-how to the Indian company during the layout planning and erection stage and the assessee company will teach such know-how to MBDL in such manner so as to assist MBDL in successfully operating its future facilities in India in the field of glass packing materials and containers.
5. Article II of the agreement deals with technical advice in transferring all its present methods of manufacture relating to packing materials and containers as follows:
(a) BCI shall provide unlimited free access to its glass factories, workshops offices and all relevant documents and drawings therein, to senior MBDL personnel, for the purpose of study, discussions and obtaining informations, designs, formulations etc., related to the manufacture of glass containers (which include all processes from raw materials to finished products and furnaces and fuels except any limitations mentioned in this contract etc.), testing and control of raw materials and glass containers manufactured on I.S Machines.
(b) BCI shall advise and assist MBDL in planning layouts of any technological installations in its production lines that MBDL may undertake later on.
(c) BCI shall assist and advise MBDL respectively contractor in planning and purchasing suitable equipments and machinery, in establishing layout drawings, lists and specifications in any glass technological context such as specific techniques, workshops, laboratory, consumables, raw materials and finished products. Such help is limited to advice, occasional inspection or monitoring but cannot be extended to engineering activity.
6. MBDL undertook to receive for BCI's expatriates all necessary official approvals such as residence permits, work permits and VISA renewals on its expenses, if any, in India. Article III speaks about delegation of assessee's engineers at the request of Mohan Breweries. Article III deals with technical assistance as follows:
1. BCI, to the best of its knowledge and ability, shall advise and assist MBDL by the delegation of specialists to MBDL. In detail, the technical assistance will comprise of the following items:
(a) Technical problems
—raw material
—batch house
—batch and glass composition
—glass and melting furnace
—forehearth
—feeder and production techniques
—surface coating
—annealing lehrs
—cold and sorting and packaging
—quality control
—internal transport and warehouse
—laboratory know-how
—mould design and maintenance
—energy : electricity, gas and oil
—water and waste water
—light weighing glass containers.
(b) Management problems
—production control : daily, monthly and yearly
—control of efficiencies of production machines on the basis of international standards (MPA) and BCI systems
—control of costs, administration and accounting advice
—computerization.
7. Article IV touches on technical training on the following terms:
BCI is prepared to train people of MBDL within its training possibilities in its training centre as well as in production practice. According to the qualification of the trainer BCI will undertake training in following items:
—tank operation
—sorting
—machine operation
—mould design and maintenance
—elements of batch calculation
—laboratory (chemistry, physics and microscopy)
—maintenance systems and spare parts organisation
—computerization.
8. In terms of the agreement thus entered into, the assessee was paid technical know-how fees for five years. The assessee contended that the technical know-how fees are not liable to tax as per art. 12 of the DTAA between India and Thailand. The Revenue, however, rejected the said contention and referred to the definition of “royalty” under art. 12 to take the view that the definition of “royalty” under art. 12 means the consideration for transferring the know-how. Since what had been transferred was sharing of knowledge, the consideration received was not convered by the definition of “royalty”, as available under art. 12 of the DTAA. The assessing authority pointed out that the assessee is in the manufacture and trading of glass. Over a period of five years, it had developed technical know-how in the manufacture of glass containers. Consequently, the transfer of knowledge therein would, at best, fall for consideration under art. 7. Even herein, the officer took the view that the consideration received for transfer of technical know-how could not be treated as business profit for dealing with the same under art. 7, there being no direct nexus between the income and the activities of the business of the assessee and hence, the payment shall fall for consideration in the residual clause contained in art. 22 and could be taxed only in the Contracting State where the income arose. Thus the income received by the assessee in India was held to be taxable in India. In terms of s. 9(1)(vii) and s. 115(a)(iii), the receipts were held liable to tax at a flat rate of 40 per cent of the gross payments made.
9. Aggrieved by this, the assessee went on appeal before the CIT(A). By a common order, the CIT(A) considered the contentions on the DTAA provisions and came to the conclusion that in the context of the definition of “royalty” under art. 12, the entire payment could not be taken in for the transfer of use only of technical know-how. Thus the entire payment could not be treated as royalty to fall for consideration under art. 12. The CIT(A) also pointed out that the assessee had undertaken to provide a few services, which included test running of the entire new plant to the satisfaction of the Indian company, including the preparation for such test running by reserving for itself the right to monitor the production facilities over a three months period. This required the presence of consultants of the assessee company for a fairly long period. The assessee was to give training in India and abroad to the personnel of the Indian company. For the stay in excess of 32 man-months, an additional fee for attendance of the assessee's personnel was to be paid. So too for attendance of Indian personnel for training abroad. If it exceeded 31 months, additional payments were to be made. Thus, on the additional payment of 6,61,390 USD, the CIT(A) held that barring a sum of 4,79,640 USD, which would be treated as royalty, the receipt of the amount of 1,12,000 USD and 69,750 USD would be treated as fee for technical services received by the assessee company, which would have to be considered for taxation under art. 7, subject to the condition that the assessee had a PE in India. The CIT(A) pointed out that the DTAA with Thailand providing for consultancy over 183 days would require the existence of a PE. When the technical services such as consultancy had been dealt with under the DTAA and such receipts forming part of the business profits of the assessee, subject to an enquiry as to the existence of a PE as required under art. 7, such receipt would have to be considered for taxation under the DTAA. Thus, the CIT(A) pointed out that the assessee denied the existence of a PE in India.
10. For the asst. yr. 1991-92, the assessee filed the return of income and it was asked to file evidence for having calculated tax at 15 per cent. The assessee contended that the income receivable under art. 12 article was royalty taxable at 15 per cent. On the notice issued under s. 148, the assessee reiterated the stand as per the return originally filed. The position is so for the asst. yrs. 1992-93, 1993-94, 1994-95 and 1995-96 and the assessee claimed refund of the tax paid. For the asst. yrs. 1993-94 and 1995-96, it is seen that there was non-submission of return of income. Evidently, there is no finding in the assessment order as to whether the assessee had PE in India. In the circumstances, the CIT(A) pointed out to art. 5(2)(j) and held that in the absence of any such finding, the matter be remitted back to the assessing authority for rendering a finding. Thus the total receipt of 6,61,390 USD was to be divided into a sum of 4,79,640 USD as representing royalty, 1,12,000 USD as relatable to fee for technical services, 69,750 USD for rendering fees for technical services abroad and a sum of 2,27,500 USD as extra fees received for technical services in India. If the assessee was found not having a PE, a sum of 4,79,640 USD alone would be taxable as royalty at the rate prescribed under art. 12 of the agreement. Aggrieved by this, the assessee went on appeal, so too the Revenue. As far as the Revenue's appeal is concerned, it challenged the split up of the composite consideration received and contended that they could not be treated as business profits under art. 7 of the DTAA and that the fee for technical services would fall for consideration under art. 22 of DTAA. It further contended that the assessee had not satisfied the requirement of carrying on the business in India. Thus royalty as part of business income even as per art. 12(4) did not arise merely on the concept of PE.
11. A perusal of the order of the Tribunal shows that it agreed with the findings of the CIT(A) that the agreement covered various stages for successfully transferring the know-how. Thus the payments contemplated under the agreement were rightly allocated between royalty and fee for technical services in India and abroad. Going by the various clauses in the agreement between the parties, the Tribunal held that there was no infirmity in the order of the CIT(A) and thus it confirmed the remand order of the CIT(A) to find out whether there was a PE. Having upheld the order of the CIT(A), the Tribunal also held that art. 22 had no relevance as far as the royalty and fee for technical services contemplated under the agreement were concerned and the said article would come into play only when the item of income did not fall for consideration under any of the express provisions of the DTAA. In other words, it held that art. 22 was concerned about miscellaneous income not covered under any of the provisions of DTAA. Thus holding that royalty and fee for technical services contemplated under the agreement were taxable under art. 12 and art. 7 respectively, the Tribunal held that art. 22 could not be invoked. Having stated so, surprisingly, in para 9 of the order, the Tribunal once again considered art. 22 only to hold that the portion of fee for technical services arising in India was to be taxed in accordance with s. 115(1)(b). Referring to s. 9(1)(vii)(b) of the Act, which deals with income by way of technical services payable by a person who is a resident in India, it held that the portion of fee for technical services arising in India has to be taxed de hors any business connection. In the result, dismissing the assessee's appeals on other issues and allowing the assessee's appeal on this issue alone, it allowed the Revenue's appeal in part. Aggrieved by this, both the Revenue as well as the assessee are on appeal before us.
12. We had already extracted in the preceding paras, the clauses under the agreement between the parties. As far as the provisions under the DTAA are concerned, we need to note art. 5, art. 7, art. 12 and art. 22.
13. PE is defined under art. 5, sub-art. (1) as follows:
“For the purpose of this Convention, the term ‘PE’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on.”
14. Article 5(2) states:
“The term PE shall include:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, a quarry, an oil or gas well or other place of extraction of natural resources;
(g) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on;
(h) a building site or construction or assembly project or supervisoiy activities in connection therewith, where such a site, project or activity continues for the same or a connected project for a period or periods aggregating to more than 183 days;
(i) a warehouse, in relation to a person providing storage facilities for others;
(j) the furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating to more than 183 days.”
15. Thus, going by the definition of art. 5 as to PE, the business activity of the enterprise in a Contracting State would come up for consideration only if and when the said enterprise is a PE, satisfying the definition of “PE” under art. 5.
16. Article 7 deals with business profits to be considered for taxation under DTAA. The said article states that the income or profits of the enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the Contracting State through a PE situated therein. The taxability is only so much of the income as is attributable to that PE for sale in that other State, the goods or merchandise.
17. Article 12 defines “royalty” as follows:
“The term ‘royalties’ as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematography films, phonographic records, and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.”
18. Sub-art. (4) to art. 12 states that where the assessee being resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a PE situated therein, or performs in that other State independent personal services from a fixed base situated therein, the provisions of art. 7 or art. 15, as the case may be, would apply.
19. As already seen from the extract of the definition of “PE” as given under art. 5, sub-art. (2)(j) includes rendering of services including consultancy services, by a resident of one of the Contracting States through employees or other personnel within the other Contracting State for a period or periods aggregating to more than 183 days while the same will qualify for consideration under the definition of “PE”. As far as this aspect is concerned, learned counsel appearing for the assessee as well as learned standing counsel appearing for the Revenue pointed out that after the remand order of the CIT(A), the Jt. CIT had given effect to the same only to record a finding that the assessee had stayed in India for 175 days for the period 1st April, 1990 to 31st March, 1991, which is relevant to the asst. yr. 1991-92. In respect of asst. yr. 1992-93, from 1st April, 1991 to 31st March, 1992, the assessee had stayed in India for 176 days. In respect of asst. yr. 1993-94 from 1st April, 1992 to 31st March, 1993, the assessee had stayed in India for 162 days and in respect of asst. yrs. 1994-95 and 1995-96, the assessee had not stayed in India during the previous year and the assessee had no PE and the assessee had not stayed in India during the previous years. Thus, for all the assessment years under consideration, the factual finding is that the assessee had no PE in India even to bring those income which fall under business profits for the purpose of inclusion under art. 7. This would be so even in respect of all these years falling for consideration under art. 12(4). Thus as far as the remand order of the CIT(A) is concerned, as of date, the fact remains that what would be assessable would be only those income which fall for consideration under art. 12 and nothing beyond.
20. It must be pointed out herein that the consideration as to whether the receipt would fall for consideration as royalty or fees for technical services would depend on the clauses in the agreement between the assessee and MBDL. In a detailed discussion made on the various clauses under the agreement, read in the context of art. 12 of the DTAA, the CIT(A) pointed out that the word “royalty” under the agreement is a very comprehensive one and that the case on hand is distinguishable from the decision of the Karnataka High Court in Citizen Watch Co. Ltd. v. IAC, (1984) 148 ITR 774 (Kar) as well as the decision of the Tribunal which was relied on by the assessee. Given the fact that the services rendered by the assessee covered transfer of know-how as well as giving technical assistance and technical advise, learned counsel appearing for the assessee pointed out that what went in as by way of technical advice was with reference to the resolving of the day-to-day problems in the implementation of the transfer of technical know-how. The technical advice given related to resolving the issues in the actual working of the transferred knowledge and there was no transfer of technical know-how to fall for consideration under the head of “royalty”, hence, the entire payment has to be treated as falling for consideration between payment of royalty and payment of rendering technical advice. On going through arts. 2 and 3 of the agreement between the assessee and the Indian company, we agree with the view of the CIT(A) that the entirety of the payment cannot be considered as one falling for consideration under art.
21. Further, taking note of the fact that the assessee company was also involved in training Indian personnel in India and abroad and taking note of the clauses in the agreement as regards the payment and the additional payment depending on the period of training, over and above what was to be paid under the agreement for the duration specified therein, the CIT(A) rightly came to the conclusion that the component of technical services in India included the extra months of training, so too the training abroad. In computing the said amount, rightly the CIT(A) arrived at a finding that a sum of 1,12,500 USD and 69,750 USD would be the amount which would be treated as received for technical services rendered by the assessee and the amount of 4,79,640 USD relates to royalty payment, assessable as per art. 12.
22. Even though the Revenue canvassed this issue before the Tribunal, in the absence of any material to read the clauses otherwise, rightly, the Tribunal came to the conclusion that a sum of 4,79,640 USD alone would fall for consideration under art. 12 as royalty income and the other to be assessed as by way of technical services. As already pointed out even herein, with the finding of the assessing authority on the remand order that the assessee had no PE, the said amount cannot be brought under art. 7. In the light of the above, we have no hesitation in confirming the order of the Tribunal.
23. As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22. Even though learned standing counsel made a submission that the fee paid towards technical services cannot be brought towards business income, yet in the absence of any material to show that the same is not related to the business of the assessee, we have no hesitation in rejecting the said contention. Even assuming for a moment that the assessee is an Indian company, given the nature of business of the assessee, if the income earned would quality for consideration on the normal computation as business income, we do not find that the said character would undergo a change merely on the score that the assessee is not an Indian company.
24. In the light of the above, we allow the assessee's appeals viz., Tax Case (Appeal) Nos. 1187, 1307 and 1342 of 2005, 34 of 2006 and 743 of 2007 and reject the Revenue's appeals viz., Tax Case (Appeal) Nos. 1460 to 1464 of 2005 and set aside the order of the Tribunal as far as its consideration on art. 22 of DTAA is concerned. No costs.
Comments