Elkem Spigerverket A/S v. Income Tax Officer

D.N Sharma, J.M:— As both these appeals filed by the assessee for the asst. yrs. 1979–80 and 1981–82 give rise to some common issues, they were heard together and for the sake of convenience, are being disposed of by this single order.

2. The assessee is a non-resident Norwegian company. It entered into an agreement with the State Industrial and Investment Corporation of Maharashtra Ltd. for supplying to chnical know-how relating to the operation of furnace in production of pig iron. The agreement was signed by the said Indian company on 21st November,.1973 and by the assessee company on 22nd Nov., 1973. During the accounting year relevant to the asst. yr. 1979–80, the assessee company received a sum of Rs. 12,35,284 (equivalent to Norwegian Kr. 7,59,000) from the aforesaid Indian company. Before the ITO it was contended on behalf of the assessee company that the said amount was not taxable as the payment was in the nature of lump sum payment for sale of technical know-how and was not in the nature of royalty. In the alternative, it was contended that the know how constituted a capital asset and the payment; received by the assessee company from the sale of such capital asset and the profit arising therefrom was the capital gain and as such, it was not taxable by virtue of Art. XI of the agreement for avoidance of double taxation between the Government of India and the Government of Norway (short DTA agreement). The ITO was of the view that the payment was made to the assessee company by the aforesaid Indian company for imparting knowledge relating to the operation of the furnace in the production of pig iron and to grant the Indian company the right to use confidential design and information including the right to use the relevant patents owned by the assessee company. The ITO was further of the view that s. 1(b) of the agreement executed between the assessee company and the Indian company clearly indicated that the payment received by the assessee company was in the nature of royalty. While coming to this conclusion the ITO took into consideration the definition of the term ‘royalty’ as given under Art: VII of the DTA Agreement. The ITO accordingly did not accept the contention advanced on behalf of the assessee and so added the amount of Rs. 12,35,284 as the assessee's income from business.

3. A sum of Rs. 14,200 (equivalent to Norwegian kr. 8697.50) was received by the assessee company during the year from M/s Panyam Cements and Mineral Industries Ltd. According to the assessee this amount was also not taxable in its hands. It was contended that the sum represented the balance of pay and allowance of Mr. R.L Yesteboe, a technician who was employed under Panyam Cement and Mineral Industries Ltd. and whose appointment and remuneration was approved by the Government of India under s. 10(6)(viia) of the IT. Act, 1961. It was further contended on behalf of the assessee that as the entire income of Mr. Yesteboe. has been taxed in India; under the head ‘salary’ the question of taxing the same amount again in the hands of the company did not arise. Alternatively, it was urged that the said amount was in the nature of technical fees as defined in s. 9(1)(vii) and if it was treated as profit, it would only constitute commercial profit which would not be liable to tax in India by virtue of Art. III of the DTA Agreement. The ITO was of the view that the aforesaid amount represented remuneration received by the company for placing their engineers/technicians at the disposal of the Indian company and that the amount was assessable in its hands by virtue of Art. III(3) of the DTA Agreement. So, the amount of Rs. 14,200 was also subjected to tax under the head ‘income from business’.

4. The assessee appealed to the CIT(A) who confirmed. the ITO's action in treating the sum of Rs. 12,35,284 as royalty for the purpose of assessment. Regarding the sum of Rs. 14,200 added by the ITO under the head income from business. the CIT(A) has mentioned that the assessee has not furnished any evidence to show that this amount has been assessed to tax in the hands of the foreign technician. He further recorded a finding that there was nothing to show that the foreign technician was an employee of the Indian company. From the collaboration agreement the. CIT(A) found that the non-resident Norwegian company was to place at the disposal of the Indian company necessary engineers for consullation regarding erection and initial operation of the furnace and to instruct the Indian companies operators in the use of the same. For placing the services of the technician at the disposal of the Indian company, the non-resident Norwegian company received remuneration which did not constitute technical fees. Accordirg to the CIT(A) the sum of Rs. 14,200. represented income from personal services as referred to in Art. III(3) of the DTA Agreement and, such income was assessable to tax in India. So, the ITO's action in this regard was also confirmed by the CIT (A). Aggrieved,-the assessee. has come up in second appeal before the Tribunal.

5. The assessee company entered into yet another agreement with Maharashtra Elektrosmelt Ltd., Bombay. The agreement was executed on 31st July, 1979. During the account ing year relevant to the asst. yr. 1981–82, the assessee company received from the said Indian company a sum of Rs. 2,77,557 (equivalent to Norweigan Kr. 1,81,800) under the aforesaid, agreement. The assessee company claimed that the said amount was not liable. to tax in India by virtue of the DTA Agreement. It was further claimed that the aforesaid amount re presented engineering fees. The ITO did not agree with the contention advanced on behalf of the assessee and held that the aforesaid receipt was in the nature of royalty and hence, it was liable to tax in India. The order of the ITO on the point was upheld in appeal by the CIT (A).

6. Shri P.T Sanyal; learned authorised representatrve for the assessee, submitted “before us that the assessed company has no permanent establishment in India. The receipts of Rs. 12,35,284 & Rs. 2,77,557 represented industrial or commercial. profits and, therefore, these amounts were not liable to tax in the hands of the assessee company in India by virtue of Art. III(1) of the DTA Agreement… Shri Sanyal then took us through the definition of the term industrial “or commercial profits as given in Art. III(3) of the DTA Agreement to show that the payments received by the “assessee company were not in the (nature of royalties and, there fore, since the payments “represented industrial or commercial profits they could not be sub jected to tax in India. Shri Sanyal then re ferred J to the definition of the term ‘royalty’ as contained in Art. VII of the DTA Agreement in support of the contention that the payments received by the assessee company from the two Indian companies could not be regarded;, as royalty. In this connection it was further, sub mitted that in view of the DTA. Agreement between the Government of India and the Gov ernment of Norway, the provisions of the DTA Agreement will prevail, over. the provisions of the IT Act, 1961. It was then contended that definition or the term ‘royalty’ as given in s. 9(1) of the IT Act, 1961 cannot be looked, into and applied for the purpose of the present case in order to determine the nature of the receipts. In this connection our attention was invited to Art. II(2) of the DTA Agreement which lays down that in the application of the provisions of this Agreement in one of the territories any term not otherwise defined in this Agreement shall, unless the context otherwise required, have the meaning which it has under the laws in force in the territory relating to, the taxes which are the subject of this Agreement. Reference has also been made to Art. XVII which says that the laws in force in either of the territories will continue to. govern the assessment and taxation of income in the respective territories except where express, provision to the contrary is made in this Agreement.

7. Shri Sanyal 0then took us, (through lithe re levant provisions of the Agreement executed in November, 1973 between the assessee com pany and the State Industrial and Investment Corporation of Maharashtra Ltd. as also the agreement executed in July, 1979 between the assessee company and Maharashtra Elektrosmelt Ltd. in support of the contention that the payments received from these two Indian companies were not in the nature of royalties. Re garding the payments made by the State Indus trial and Investment Corporation of Maharashtra Ltd. it was urged by Shri Sanyal that the Agreement executed in Nov., 1973 clearly showed that the payment of Rs. 12,35,284 (equivalent to Norwegian Kr. 7,59,000) was made: (i) to impart to the Indian company knowledge relating to the operation of the furnance in production of pig iron; (ii) to grant to the Indian company the right to use confidential design and (iii) to impart information to the Indian company. It was urged that payments made by the Indian company in so far as it related to the right to use confidential design could at the most be regarded as royalty within the meaning of Art. VII and that the payment in so far as it related to the remaining two items could not be treated as royalty for the simple reason that knowledge and information imparted to the assessee company are not covered by the definition of the term ‘royalty’, as given in Art. VII. It was thus submitted that it would be necessary to make an apportionment to ascertain the payment related to the right to use the confidential design. In this connection it was submitted that the use of confidential design related only to the operation of the furnace in production of pig iron and that the agreement for supply of technical know-how was linked Up with the agreement relating to sale of equipments. Confidential design could not be used by the assessee for any other purpose except for the purpose of operation of the furnace. It was thus submitted that for all these reasons the portion of the payment attributable to the right to use the confidential design would be negligible.

8. Regarding the payment received by the assessee company under the agreement executed in July, 1979 between the assessee com pany and Maharashtra Elektrosmelt Ltd. the submission made by Shri Sanyal is that under the said agreement the drawings, specifications, etc. as also information relating to the operation of the furnace in production of ferro-manganese amounted to an outright sale and that it was not a case of mere right to use drawings, information etc. and, therefore, the payment received by the assessee company did not amount to royalty within the meaning of Art. VII and hence, the receipt in the hands of the assessee being in the nature of industrial or commercial profits, was not taxable in India by virtue of Art. III(1) of the DTA Agreement.

9. Regarding the sum of Rs. 14,200, it was contended by Shri Sanyal that this amount re presented the balance of pay and allowances received by Mr. Yestaboe. The Indian company, namely, M/s Panyam Cements & Mineral Indus tries Ltd. remitted the sum of Norwegian Kr. 8697,50 (equlvalant to Rs. 14,200) to the asse ssee company as the balance of pay and allowances of Mr. Yesteboe, a technician wohse appointment as technician was duly approved by the Govt. of India. It was urged that the entire income of Mr. Yesteboe has been taxed in India and, therefore, the question of subjecting the aforesaid amount to tax in the hands of the assessee company again did not arise. In the alternative, it was further submitted that the aforesaid payment was in the nature of technical fees as defined in s. 9(1)(vii) and since it was part of commercial profits of the assessee com pany it was not liable to tax in India by virtue of Art. III(1) and that this receipt did not amount to royalty as defined under Art. VII. In this connection reliance has been placed on the decision of the Special Bench of the Tribunal in the case of Siemens Aktiengesellschaft v. ITO, (1987) 64 CTR (Trib) (Bom) (SB) 21 : (1987) 34 Taxman 258 (Tax Magazine).

10. Shri B.B Kundu, learned departmental representetive, has on the other hand, strongly supported the impugned orders of the authori ties below. It was contended that relevant laws which were in force during the relevant assessment years would be applicable in this case. In this connection reference was made to the provisions contained in s. 4(1). Accord ing to Shri Kundu, the payments received by the assessee company in the accounting years relevant to the two assessment years under appeal, would be taxable as income in the hands of the assessee under s. 9(1)(i) of the IT Act, 1961 as because of the collaboration agreements with different Indian companies and the pay ments received thereunder by the assessee com pany it was clear that there was a business connection in India between the assessee com pany and those Indian companies. In support of this contention reliance has been placed on the decisions of the Andhra Pradesh High Court in the case of Bharat Heavy Plate and Vessels Ltd. v. Addl. CIT, (1979) 9 CTR (AP) 4 : (1979) 119 ITR 986 (AP) & Skoda Export v. Addl. CIT, (1983) 37 CTR (AP) 77 : (1983) 143 ITR 452 (AP). It was then contended by Shri Kundu that the payments received by the assessee company under various agreements were in the nature of royalty and, therefore, for this reason also the receipts in the hands of the assessee company were liable to tax in India.

11. We have considered the rival submissions as also the facts on record and have also per used the paper book filed by the assessee. We have also considered the authorities cited on behalf of the parties. Double Taxation Avoidance Agreements are entered into by the Central Government under s. 90 of the IT Act, 1961 with other countries. The DTA Agree ment with wnich we are concerned in these appeals was entered into between the Govern ment of India and the Government of Norway in 1960. It is reproduced at pages 887 to 894 of Kanga and Palkhiwala's Law and Practice of Income-tax, Seventh Edition, Vol. II. Art. II(2) of this agreement lays down that in the application of the provisions of this agreement in one of the territories any term not otherwise defined in this agreement shall, unless the con text otherwise required, have the meaning which it has under the laws in force in that territory relating to the taxes which are the subject of this agreement. Art. XVII(1) says that the laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this agreement. These provisions thus make it quite clear that the provisions of the DTA Agreement override the provisions of the IT Act, 1961. Circular No. 333 dt. 2nd April, 1982 issued by the CBDT (see Taxmann's Direct Taxes Circular Vol. I, page 584) has clarified the legal position by saying that where a specific provision is made in the Double Tax ation Avoidance Agreement that provision will prevail over the general provisions contained in the IT Act. It further says that where a Dou ble Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions of the IT Act. Thus, even accord ing to the aforesaid Circular, the provisions of the DTA Agreement will prevail over the general provisions contained in the IT Act, 1961.

12. Art. III of the DTA Agreement is as follows:

(1) Subject to the provisions of paragraph (3) below, tax shall riot be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first-mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. If profits are so derived, tax may be levied in the first-mentioned territory on the profits attributable to the said permanent establishment.

(2) There shall be attributed to the permanent establishment of an enterprise of one of the territories situated in the other territory the industrial or commercial profits which it might be expected to derive in that other territory if it were an independent enterprise engaged in the same or similar activities under tne same or similar conditions and dealing at aim's length with the enterprise of which it is a permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is capable of determination, or the ascertainment thereof presents exceptional difficulties, the profits attributable to the establishment may be estimated or. a reasonable basis.

(3) For the purposes of this Agreement the term “industrial or commercial profits” shall not include income in the form of rents, royalties, interest, dividends, management charges, remuneration for labour or personal services or income from the operation of ships or aircraft.

13. Another Article which is important for our purposes is Art. VII which runs as follows:

Art. VII. Royalties derived by a resident of one ot the territories from sources in the other territory may be taxed only in that other territory.

In this article, the term “royalty” means any royalty or other like amount received as consideration lor the light to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plans, secret processes or formulae, trade-marks and other like property or rights, but does not include any royalty or other like amount in respect of the operation of mines, quarries or other natural resources.

14. So. under Art. VII, in the context of the present case, royalties, if any, derived by the assessee company from Indian parties would be taxable in India. This Article also defines the term ‘royalty’. The contention advanced on behalf of the assessee is that since it has no permanent establishment in India, payments received by it from Indian parties, which are part of its industrial or commercial profits, cannot be brought to tax in India by virtue of Art. III(I). Clause (3) of this Art. III carves out an exception to the provision contained in cl. (1) by laying down that income falling under certain categories shall not form part of the industrial or commercial profits with the result that it any payment received by the assessee company falls within one of the excluded categories, namely, royalties, etc. as enumerated in cl. (3), such an income would not fall under cl. (1) of Art. III and would thus be taxable in India. As Art. III of the DTA Agreement prevails over s. 9 of the IT Act, 1961 even assuming for a moment that all the profits of the assesiee company are to be deemed to have accrued or arisen in India by virtue of cl. (b) or any other clause of s. 9 (1) the provisions of Art. HI would prevail over s. 9. As has just been pointed out above, if the payments received by the assessee company from Indian parties, fall within the mischief of Art. III(3), the benefit of Art. III (I) would hot be available to the assessee with the result that such income would be taxable in India. On the other hand, if the payments received by the assessee from Indian parties do not fall within the ambit of Art. III(3), in that event, such payments forming part of its industrial or commercial profits would not be taxable in India by virtue of Art. III(1). Here it may be pointed out that though the lower authorities have not found that the assessee company has no permanent establishment in India, this, fact has not been disputed before us on behalf of the department.

15. Explanation 2 to cl. (vi) to s. 9 (1) of the Act, 1961 defines the term royalty for the purpose of cl. (vi). The definition of the term ‘royalty’ introduced in s. 9(1) solely as an Explanation to cl. (vi) cannot, therefore, be taken into consideration for the purpose of interpreting the scope of the term ‘royalty’ as used in Art. III of the DTA Agreement. In taking this view we stand fortified by the decision of the Special Bench of the Tribunal in the case of Siemens AAktiengesellschaft v. ITO (supra). As has already been pointed out above, the term ‘royalty’ is defined under Art. VII and, therefore, that definition will have to be applied for the purpose of construing the provisions of Art. III(3).

16. The first agreement with an Indian party, namely, the State industrial and Investment Corporation of Maharashtra Ltd. was executed in November, 1973. A copy of this agreement is included in the paper book filed by the assessee. Sec. (1) of this agreement reads as under:

“ES (i.e Assessee company) undertakes:

(a) to furnish drawings and specifications according to Schedule No. 1_ attached hereto.

(b) to impart to the Purchaser knowledge relating to. the operation of the furnace in production of pig iron in order that the Purchaser may obtain the maximum benefit of the equipment supplied hereunder, and to grant to the Purchaser the right to use the confidential design and information that he will receive according to the above including the right to use any relevant patent now owned or controlled by ES in the construction and use of the ELKEM pig iron fur-ace, type closed, stationary, of 33,000 KVA transformer capacity.

(c) at the Purchaser's request to place at his disposal the necessary engineers for consultation by the Purchaser regarding the erection and initial operation of the furnace and to instruct the Purchaser's operators in the use of the same”.

17. Under s. III (2), the price for imparting knowledge and granting rights as specified in s. (1)(b) above is Norwegian Kr. 7,59,003 (equivalent to Rs. 12,35,284).

18. Sec. VI of the aforesaid agreement further provides that the Purchaser, namely, the Indian party recognises that the confidential designs and information embodied in the drawings and specifications to be supplied by the assessee company are the assessee's property, and the Purchaser agrees that he will not use such confidential design and information except in connection with the furnace specified above as long as such confidential design and information are not generally available to the public. As long as the said design and information remained the property of the assessee, the Purchaser will use its best endeavours not to impart the same to any third party without written permission from the assessee company or to use it in any other way which may be detrimental to the interest of the assessee.

19. So, the assessee company received the sum of Rs. 12,35,284 as price from the Indian parties for imparting information and knowledge and granting rights as specified in s. (1)(b). Under s. 1 (b), the assessee company undertook to impart knowledge relating to the operation of the furnace in production of pig iron and to grant to the Indian party the right to use confidential design and information from the assessee company. We are not impressed by the arguments advanced on behalf of the assessee that under s. (i)(b), only a part of the payment received under s. (III)(2) and attributable to the right to use the design would fall within the definition of the term ‘royalty’ as given under Art. VII. As has been rightly pointed out on behalf of the department the definition of the term ‘royalty’ as given under Art. VII also includes any amount received as consideration for or, any other like property” or rights. In the instant case, information and knowledge which the assessee company was required to impart to the Indian patty relates to the operation of the furnace in production of pig iron. The grant of the right to use confidential design also relates to the furnace for production of pig iron. Though the words ‘information and knowledge’ have not been specifically used in the definition of the term ‘royalty’ as given under Art. VII, but the words ‘any other like property or rights’ occurring in the definition are wide enough to include any information or knowledge relating to patents, models, designs or plants etc. Having regard to the relevant provision of the collaboration agreement we have no doubt in our mind that the assessee company received the sum of Rs. 12,35,284 from the Indian party as price for granting the right to use the design, information and knowledge. Sec. VI of the agreement further makes it clear that in respect of confidential design and information the Indian party was given only a right to use them only in connection with the furnace. So, the amount received by the assessee company from the Indian party clearly partakes the nature of royalty as defined in Art. VII and so, it falls within the mischief of Art. III(3) with the result that it is taxable in India.

20. The assessee has not pressed the ground raised in the alternative to the effect that the know-how constituted a capital asset and so, the amount of Rs. 12,35,284 received by the assessee company represented the sale proceeds of this asset and that any capital gain resulting therefrom would not be taxable in India under the DTA Agreement. This ground is accordingly rejected.

21. The agreement executed in November, 1972.February 1973 was with M/s Panyam Cements. & Mineral Industries Ltd. Under this agreement the assessee company undertook to: deliver the equipments listed in Schedule No. 1 attached to the agreement and to furnish drawings and specifications according to Schedule No. 2 of the agreement. The assessee also undertook to impart to the Purchaser, i.e the Indian company, knowledge relating to the operation of the furnace in the production of calcium carbide. Under s. (1)(c) the assessee company further undertook at the Purchaser's request to place at its disposal the necessary engineers, to consult regarding the erection and initial operation of the furnace and to instruct the Purchaser's operators in the use of the same. Sec. (III), inter alia, provides for payment of daily allowance and daily fee for each engineer placed at the disposal of the Indian party. In accordance with the terms of this agreement a sum of Norwegian Kr. 8697.50 was remitted by the Indian party to the assessee company towards the pay and allowance of Mr. R.L, Yesteboe an engineer of the assessee company. This engineer/technician was deputed by the assessee company to render technical assistance to the Indian party in terms of s. (1)(c) of the agreement. One of the contentions advanced on behalf of the assessee company is that the sum of Norwegian Kr. 8697.50 (equivalent to Rs. 14,250) was paid by the assessee company to Mr. Yestaboe and that this amount was taxed in India in the hands of the said engineer/technician and for this reason it is not again taxable in the hands of the assessee company. In support of this contention our attention was invited to certain papers' forming part of the paper book filed by the assessee. At page 3 of the paper book is a photostat copy of the letter dt. 15th March, 1982 from the Indian party intimating that the aforesaid amount was remitted to the assessee company towards the pay and allowance of Mr. Yesteboe. It is further stated in this letter that the said amount was paid persuant to s. (1)(c). of the agreement. A photostat copy of a certificate from Mr. Yesteboe is at page. 11. It confirms that the said engineer/technician received from the assessee company Norwegian Kr. 8697.50 covering daily allowance for his stay in India for the period beginning from 11th November, 1974 to 11th March, 1975. Reference has also been made to pages Nos. 4 to 7 of the paper book to show that the appointment of Mr. Yesteboe for errection and commissioning of calcium carbide plant was approved by the Government of India. Reliance has also been placed on a letter sent by the ITO, A-Ward, Kurnown to the ITO, Foreign Circle, Madras in respect of Mr. Yesteboe certifying that Mr. Yesteboe has been assessed upto 11th March, 1975 and that he has no liabilities outstanding. This certificate, however, does not show that the sum of Rs. 14,200 (equivalent to Norwegian Kr. 8697.50) was assessed in the hands of Mr. Yesteboe. From the papers filed by the assessee it is also not established that the said engineer/technician was in the employment of the Indian company, namely, M/s Panyam Cement & Mineral Industries Ltd.

22. As has just been observed above, the aforesaid payment in Norwegian currency was made by the Indian company to the assessee under s. 1(c) of the agreement. The services of Mr. Yesteboe was placed by the assessee company at the disposal of the Indian party in accordance with the provision of s. (1)(c) of the agreement to render techincal assistance to the Indian party. For rendering assistance to the Indian party through one of its engineers, the assessee company was reimbursed by the Indian party by making a payment of Norwegian Kr. 8697.50 So, the payment was not received by the, assessee company for any personal services but was made for rendering technical assistance to the Indian party through its engineer Mr. Yesteboe. In our opinion, therefore, the CIT (A) was not justified in coming to the conclusion that the payment was received by the assessee company for personal services and that for this reason the payment is covered under Art. III(3) of the DTA Agreement. We also do not agree with the contention advanced on behalf of the assessee that the payment constituted technical fees. In our opinion, the payment constituted a remuneration received by the assessee company for rendering technical assistance through one of its engineers/technicians to the Indian party. Such a payment does not fall under Art. III(3) and being part of the assessee's industrial or commercial profit, it is not taxable in India by virtue of the provision contained in Art. III(1). Such. a payment is clearly not a royalty. In the case of Siemens Aaktiengesellschaft v. ITO (supra), similar payments were considered by the Special Bench in para 52 of its order and it was held that they are exempt from taxation and cannot be brought to tax.

23. We are now left with the payment of Rs. 2,77,557 relating to the asst. yr. 1981–82 (equivalent to Norwegian Kr. 1,81,800) received by the assessee company from Maharashtra Elektrosmelt Ltd. under the agreement executed in July, 1979. Under s. 1 of this agreement, the assessee company undertook : (a) to deliver drawings, specifications and data according to Schedule No. 1 of the agreement and (b) to inform the Purchaser relating to the operation of the furnace in production of ferromanganese in order that the Purchaser may obtain the maximum benefit of the equipment supp lied under the agreement. The payment received by the assessee company from the Indian party represented price for supplying drawings, specifications, data and information to the Indian party. According to the contention advanced on behalf of the assessee under this agreement the supply made to the assessee company of drawings, etc., amounted to an out-right sale and, therefore, the payment received under this agreement did not constitute royalty as defined under Art. VII. The agreement when read as a whole, however, clearly goes to establish that under this agree ment the Indian party was granted only the right to use the designs and information and that it was not a case of out-right sale of design and information as contended on behalf of the assessee. Sec. (VI) of the said agreement reads as under:

“Sec: (VI):

The purchaser is granted the right to use the confidential design and information that he will receive according to this Agreement including the right to use any relevant patent now owned or controlled by ES in the construction and use of the ELKEM ferromanganese furnace, type closed, stationary of 33,000 KVA transformer capacity.

The Purchaser agrees that the confidential design and information embodied in the drawings and specifications to be supplied by ES hereunder will not be used except in connection with the furnace specified above as long as such confidential design and information are not generally available to the public. The Purchaser will use his best endeavours not to impart the same to any third party without written permission from ES or to use it in any other way which may be detrimental to ES. interests.

The above provision shall, however, not restrict the Purchaser from making drawings and specifications available to contractors and suppliers in connection with the manufacture and procurement of equipment not to be supplied by ES under this agreement. The Purchaser is in any case responsible that the confidential information embodied in the drawings and specifications are not used except in connection with the furnace specified above and that all such drawings and specifications are returned after the contractors' and suppliers' obligations are terminated.

24. From the provision contained in s. (VI) of the agreement it is thus abundantly clear that what was granted under the agreement to the Indian company was only the right to use the design and information that it would receive under the agreement. The Indian party also agreed that the design and information, embodied in the drawings and specifications to be supplied by the assessee company would not be used except in connection with the furnace specified in the agreement so long as such design and information are not generally available to the public. The agreement further provided that the Indian party shall return drawings and specifications after the contractors' and suppliers' obligations are terminated. So, the relevant provisions of the agreement clearly go to show that the payment under this agreement by the Indian party to the assessee company was in the nature of royalty as defined under Art. VII with the result that such payment falls under Art. III.(3) and, therefore, that this payment is taken out of the purview of Art. III(1) as such payment cannot be regarded as industrial or commercial profits of the assessee company. In our opinion, therefore, the aforesaid payment was rightly taxed in the hands of the assessee company.

25. In view of what has been said above, the appeal for the asst. yr. 1979–80 stands partly allowed to the extent indicated above. The appeal for the asst. yr. 1981–82 is dismissed.