Authority For Advance Rulings
Pfizer Corporation, In Re
Sections 5(2), 9(1)(i)
Syed Shah Mohammed Quadri, J., Chairman;
K.D. Singh & K.D. Gupta, Members
AAR No. 620 of 2003
4th October, 2004
Counsel Appeared
Gautam Doshi & Bhavin Shah, for the Applicant : Sunil Gupta, for the CIT concerned
Ruling
K.D. Gupta, Member :
The applicant, Pifzer Corporation, Panama (PC), a non-resident company, is part of the Pfizer Group, one of the world’s largest pharmaceutical conglomerates. The applicant owned the technology information pertaining to the manufacture of nutritional food supplement product manufactured and sold by Pfizer India, another group company, under the ‘Protinex’ and ‘Dumex’ trade marks. Both the trade marks are registered in India. Under an arrangement, Indian company has been using the technology information in respect of the abovementioned products without payment of any royalty.
2. In November, 2003, the EAC Nutrition Ltd., A/s, Denmark (EAC) acquired from the applicant the trade marks and technology information related to the said products by two separate agreements. A separate agreement was entered into between EAC, Denmark and Pfizer India for early termination of the licence granted to Indian company to manufacture under the said trade marks. A sum of US $ 7 million was paid as consideration for extinguishment of licence. The technology information, which is the subject-matter of this application was sold for US $ 5 million. Clause 2 (2.5) of the agreement stipulates that in exchange for the purchase consideration, the applicant shall on the effective date, deliver, transfer or make available to EAC, the technology information in the form of a dossier with technical information and contents as outlined in Sch. 1 to the satisfaction of EAC. It is claimed that the handing over of the dossier containing technical information took place in Bangkok. EAC has withheld tax @ 21 per cent on payment of consideration to the applicant for the transfer of technology information and the tax has been deposited with the Government of India.
3. The applicant has objected to the TDS and has sought ruling on the following question : “Whether the income derived by the applicant, a company incorporated in and tax resident of Panama, from the transfer of documents containing know-how and technical information, outside India, to EAC Nutrition Ltd. A/s, a corporation incorporated under the laws of Denmark, under the Sale and Purchase of Technology Agreement dt. 30th Nov., 2002 would be taxable in India having regard to the provisions of the IT Act, 1961 ?”
4. Along with the written submissions, the applicant has sought permission of the Authority to revise the question mentioned above. The revised question is as under : “Whether the receipt by the applicant, a company incorporated in and the tax resident of Panama, from the transfer of documents containing know-how and technical information, outside India, to EAC Nutrition Ltd. A/S, a corporation incorporated under the laws of Denmark, under the Sale and Purchase of Technology Agreement dt. 30th Nov., 2002 would be taxable in India having regard to the provisions of the IT Act, 1961 ?”
5. The only change in the revised question is substitution of the word “receipt” for the word “income” used in the question as originally framed. It was pointed out to the applicant’s counsel by the Bench in the course of hearing that the applicant has admitted that the receipt from the transaction under consideration was “income” though in the arguments it was claimed that the receipt was not in the nature of income. The applicant sought permission to revise the question and no objection on this account was raised by Revenue. In the circumstances, revised question is taken on record.
6. Shri Gautam Doshi, who appeared for the applicant, explained that the applicant is not engaged in the business of trading in the technology information and that it is a settled proposition of law that the consideration for an outright transfer of know-how would be a capital receipt unless the recipient is in the business of buying and selling know-how. Reference has also been made to the Bombay High Court’s judgment in the case of CIT vs. Ralliwolf Ltd. (1983) 32 CTR (Bom) 79 : (1983) 143 ITR 720 (Bom) and House of Lord’s order in the case of Moriarty vs. Evans Medical Supplies Ltd. (1959) 35 ITR 707 (HL) wherein it has been observed that where the owner of an intangible asset like know-how or a patent sells it or grants an exclusive licence to another which pro tanto disentitles the owner from exercising his rights therein, the transaction amounts to an assignment of capital rights and the payment is regarded as a capital receipt. During the course of hearing, the counsel quoted extensively from the Supreme Court’s judgment in the case of Scientific Engineering House (P) Ltd. vs. CIT (1985) 49 CTR (SC) 386 : (1986) 157 ITR 86 (SC) to support his contention that expenditure incurred by way of purchase price of the drawings, designs, charts, plans, processing data and other literature was undoubtedly of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature, etc. was acquired by the assessee. Reliance was also placed on the Supreme Court’s judgment in the case of Associated Cement Companies Ltd. vs. Commr. of Customs 2001 (42) RLT 937 SC to show that the moment the intangible asset in the form of technical advice or information technology is put on a media, whether paper or diskettes, then what is supplied becomes chattel, i.e., a tangible asset. Since the dossier containing technical know-how being the capital asset, was handed over by the applicant to EAC out of India, the capital gains on transfer of such asset will not be subject to tax in India since both parties to the transaction are non-residents.
7. According to the counsel, as per s. 5(2) of the IT Act (Act), income of a non-resident is liable to tax in India if (a) it is received or deemed to be received in India, or (b) it accrues or arises or is deemed to accrue or arise in India. Since, in the instant ease, the payment to be made by EAC has been received by the applicant outside India, such payment is not taxable in India on the basis of receipt. In the absence of receipt of the consideration in India, gains from transfer of a capital asset can be taxed in India only if the whole or any part thereof has accrued in India. For any part of the gains to accrue in India, it is necessary that either the capital asset is situated in India or the delivery of capital asset takes place in India. In the instant case, the capital asset, i.e., the technology information, was at the time of transfer situated in Bangkok and delivery of the dossier containing technical information was also given in Bangkok. Therefore, no gains on the transfer of the capital asset accrued in India. It was also mentioned by the counsel that the applicant had purchased the know-how and technical information for these very products from the EAC (when it was doing business in different name) about 30 years back. It is also claimed that no income can be deemed to accrue or arise in India under s. 9 of the Act. Under s. 9(1)(i), income in the nature of capital gains can be deemed to accrue or arise in India only when it accrues or arises through the transfer of capital asset situated in India. Since, at the time of transfer, the technology information in the form of documents was situated in Bangkok and the delivery thereof was also given in Bangkok, the gain on sale thereof cannot be deemed to accrue or arise in India. The counsel also claimed that since payment for an out and out sale of know-how is regarded as a capital receipt, it cannot be deemed as royalty income under s. 9(1)(vi) of the Act. It is stated that the definition of the term ‘royalty’ under Expln. 2 to s. 9(1)(vi) clearly excludes any consideration which would be income of the recipient chargeable under the head ‘Capital gains’. In the instant case, the technology information constitutes capital asset in the hands of the applicant and any gain on its outright sale would be chargeable only under the head ‘Capital gains’, which is excluded from the definition of ‘royalty’. Reliance has also been placed on the Advance Ruling in the case of Pro-quip Corporation, In re (2002) 174 CTR (AAR) 531 : (2002) 255 ITR 354 (AAR). In the case, the Authority held that there is well known distinction between the out and out sale of property and allowing use of the property or technical know-how. In the former case, property which may include persons’ business transferred unconditionally and becomes property of the purchaser. In the latter case, the purchaser only gets the right to use the property. The payment in this latter case may be treated as licensing fee or royalty but the payment in the first category of cases cannot be treated as royalty, unless there is a special definition, making such payments royalty. According to the counsel, the consideration received on transfer of technology information was, therefore, not chargeable to tax under the Act either under s. 5 or s. 9 of the Act. Shri Sunil Gupta who appeared for the Department, however, pleaded that the payment under consideration for transfer of process of manufacture was in fact imparting of technical knowledge and was liable to tax as ‘royalty’ under s. 9(1)(vi) of the Act. He placed reliance on CBDT Circular No. 202 dt. 1st Jan., 1977 which explained the intention of the legislation for amendment introduced by the Finance Act, 1976. By this amendment a new cl. (vi) in s. 9(1) was inserted clearly specifying the circumstances in which the royalty income will be deemed to accrue or arise in India and also defining the term ‘royalty’. He pleaded that royalty income consisting of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawings, or process or trade mark or similar property will be chargeable to tax in India. According to him, even if there was outright sale of technical information, it was covered by the definition of ‘royalty’ under s. 9(1)(vi) of the Act. He referred to cl. (i) of Expln. 2 to s. 9(1)(vi) which specified that consideration for the transfer of all or any rights in respect of patent, etc. is chargeable to tax as ‘royalty’. Reference was also made to AAR Ruling reported in XYZ, In re (1999) 153 CTR (AAR) 224 : (1999) 238 ITR 99 (AAR) (P. No. 22 of 1996) in which the Authority ruled that royalty paid outside India as a consideration for granting the license to use the trade mark in India is liable to Indian tax. The Departmental Representative also placed reliance on the Calcutta High Court judgment in the case of N.V. Philips Gloeilampenfabrieken Eindhoven vs. CIT (1987) 65 CTR (Cal) 103 : (1988) 172 ITR 521 (Cal) in which the Court held that income received for supplying specialized information which was exclusive in nature, the payment partakes the nature of royalty. Certain orders of Tribunal were also referred to. It was pleaded that even if transfer of technical information in the form of dossier is treated as transfer of capital asset of tangible nature, it will be taxable in India because the capital asset was situated in India, both in tangible and intangible form since the process was being used in India for a long time and was developed in India. It would not make a difference simply because another copy of the information was also available outside India. In reply, the counsel of the applicant reiterated his arguments made earlier. It was admitted that a copy in intangible form was available in India; but another copy was available outside India to the applicant which was transferred to EAC at Bangkok. The counsel pleaded that law on situs of intangible asset is not very clear because it can be present at different places at the same time. The written submissions were received vide letter dt. 12th Aug., 2004, from the applicant’s counsel. The arguments advanced therein have already been dealt with in the preceding paragraph. However, the counsel has also raised one plea which was neither mentioned in the application nor raised in the course of hearing. Reliance has been placed on the observations of Mumbai High Court in the case of Cadell Weaving Mill Co. (P) Ltd. vs. CIT (2001) 166 CTR (Bom) 7 : (2001) 249 ITR 265 (Bom) and it is stated that the capital gains not chargeable for any reason under s. 45 cannot be brought to tax as income by applying general connotation under s. 2(24). A copy of the judgment has also been enclosed with the written submissions. Two issues came for consideration before the High Court—(a) Nature of amount receivable on surrender of tenancy rights, and (b) In a case where cost of acquisition could not be computed, whether capital gains can be taxed under the head ‘Income from other sources’ ? The Court held that tenancy rights were capital asset and that heads of income under the Act were mutually exclusive and, therefore, in a case where cost of acquisition could not be computed, capital gains could not be assessed under the head ‘Income from other sources’.
13. We have considered the rival submissions. Since there is no DTAA between India and Panama, the taxability of the transaction has to be considered only under the domestic law. The question for consideration is the nature of property which is subject-matter of transfer and if it is a capital asset, where is it situated because no tax liability under the domestic tax arises on transfer of a capital asset situated outside India.
14. The undisputed fact is that the technology information was owned by the applicant, it was for a very long time used in India, almost exclusively and, therefore, available in India both in the form of a dossier as well as in intangible form. In the case of Scientific Engineering House (P) Ltd. (supra), to enable the appellant to manufacture scientific instruments in India, the foreign collaborator agreed to render ‘documentation service’ by supplying to the appellant an up-to-date, correct and complete set of each of the five types of documents viz., manufacturing drawings and full processing documents for which lump sum payment was made. The Court held : “This expenditure was incurred by the appellant as and by way of purchase price of the drawings, designs, charts, plans, processing data and other literature, etc., comprised in ‘documentation service’ and was of a capital nature as a result whereof a capital asset of technical know-how in the shape of drawings, designs, charts, plans, processing data and other literature was acquired by the appellant.”
15. Similar view was expressed by the apex Court in the case of Associated Cement Cos. Ltd. (supra) and the Court observed : “It is true that what the appellants had wanted was technical advice or information technology. Payment was to be made for this intangible asset. But the moment the information or advice is put on a media, whether paper or diskettes or any other thing, that which is supplied becomes chattel.” We are, therefore, of the view that transfer of technical information in the form of a dossier was transfer of a capital asset.
16. As regards the situs of the asset which is subject-matter of transfer, it is admitted that the said asset was available in India, both in tangible as well as intangible form before the transfer to EAC (Denmark). It is also not disputed that for a very long time the said information was almost exclusively used in India and improvements and improvisations in the said information were made in India. However, it is also not disputed that Indian company was only a licensee and original technical know-how was always available with the owner, i.e., the applicant. Once the Indian company entered into an agreement with EAC Denmark for early termination of licence to manufacture these products the technical know-how reverted back to the owner and there was extinguishment of right to manufacture for which consideration has been paid to Indian company. As a result no asset related to technical know-how was located in India either in tangible or intangible form after termination of licence granted to Indian company. The subsequent agreements between EAC Trading (P) Ltd., an Indian affiliate of EAC Denmark and Pfizer India to have business support during the initial period of EAC Trading’s operations in India do not affect the situs of asset which is subject-matter of transfer. We are of the view that the situs of the technical information, which is the subject-matter of the sale agreement, was not in India in any form after early termination of licence.
17. Sec. 5(2) of the Act provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source which— (a) is received or is deemed to be received in India; or (b) accrues or arises or is deemed to accrue or arise to him in India. It is pleaded that since it has been claimed that the transfer of technology information took place in Bangkok, i.e., outside India, no income was received or arose in India. Sec. 9(1) deals with the cases where income is deemed to accrue or arise in India. Sub-cl. (i) lays down that all income accruing or arising whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. We have already held that on early termination of licence to manufacture these products, the technical know-how, both in tangible as well as intangible form reverted back to its owners in Panama and, therefore, the situs of the capital asset transferred to EAC Denmark was outside India. Therefore, the receipt under consideration is not chargeable to tax either unders. 5 or s. 9 of the Act. We are, therefore, of the view that receipt from transfer of technical information in the form of dossier in Bangkok is a receipt on transfer of capital asset and is not chargeable to tax in India under s. 5(2)(ii) r/ws. 9(1)(i) of the Act as the asset in question was situated outside India. We rule in AAR No. 620 of 2003 as under : “Having regard to the provisions of the IT Act, receipt by the applicant from the transfer of know-how and technical information in the form of a dossier under the Sale and Purchase of Technology Agreement dt. 30th Nov., 2002, would not be chargeable to tax in India.”
[Citation : 271 ITR 101]
