Calcutta H.C : Whether on the facts and in the circumstances of the case and on a true interpretation of the relevant provisions of the Indo-German Agreement for Double Taxation, prior to its Amendment in 1984, the sums received by the assessee for design and technical services for the construction work, i.e., the second bridge over the river Hooghly is chargeable to income-tax under the IT Act, 1961.

High Court Of Calcutta

Leonhardt Andra Und Partner Gmbh vs. CIT

Sections 9(1)(vi), 90, Double Taxation Avoidance Agreement between India & Germany, Art. III

Asst. year 1981-82

Tarun Chatterjee & S.N. Bhattacharjee, JJ.

IT Ref. No. 101 of 1994

12th December, 2000

JUDGMENT

S.N. BHATTACHARJEE, J. :

In this reference under s. 256 (1) of the IT Act, 1961, the following questions have been referred to this Court :

(1) Whether on the facts and in the circumstances of the case and on a true interpretation of the relevant provisions of the Indo-German Agreement for Double Taxation, prior to its Amendment in 1984, the sums received by the assessee for design and technical services for the construction work, i.e., the second bridge over the river Hooghly is chargeable to income-tax under the IT Act, 1961.

(2). Whether, on the facts and in the circumstances of the case and on a true interpretation of the Indo-German Agreement for Double Taxation, the transfer of the drawings, designs and technical services under the collaboration agreement constituted an out and out transfer of such rights and as such the sums received therefor could be treated as royalty for the purpose of the Indo-German Double Taxation Agreement and liable to Indian income-tax.

(3). Whether the sums received by the assessee for the supply of designs, drawings and technical services constituted “industrial and commercial profits” for the purpose of the Indo-German Agreement for Double Taxation and as such, the same is assessable under the Indian IT Act, having regard to the admitted position that the assessee has no permanent establishment in India within the meaning of the said Agreement.

(4). Whether even assuming though not admitting that the sum received by the assessee constitutes royalty, the agreement dt. 18th April, 1980, can be treated as a continuation of the agreement dt. 19th July, 1974, which had been duly approved by the Central Government and as such the said sum is a liable to be assessed under the Indian IT Act, in view of the proviso to s. 9 (1)(vi) of the IT Act, 1961 ?

(5) Whether, in any event, the sum received by the assessee for the supply of designs, drawings and technical services constituted “fees for technical services” for the purpose of the Double Taxation Agreement and is chargeable to Income-tax under the IT Act, 1961 ?”

On 19th July, 1974, the assessee-company, a foreign company registered in West Germany with registered office at Stuttgart, entered into a design contract with the Hooghly River Bridge Commissioners (for short ‘HRBC) in connection with the design of the second Hooghly Bridge to be built over the river Hooghly. The HRBC was a statutory authority created by the State of West Bengal for the purpose of construction of the said bridge. M/s Bhagirathi Bridge Construction Co. Ltd. (for short BRBC) was a contractor engaged for designing and constructing the bridge. The said design contract came to an end on 31st Dec., 1978 after extension. Another agreement was entered into between the assessee-company and the HRBC on 18th April, 1980. For the accounting year ending on 31st March, 1981 relevant to the asst. yr. 1981-82, the assessee filed a return of income showing ‘Nil’ income. It was stated that the assessee had no permanent establishment in India and the services were entirely rendered outside India. It was further claimed that the only income earned by the assessee-company was by way of fees for technical services within the meaning of s. 9(1)(vii) of the IT Act, 1961 (hereinafter referred to as the Act). It was further claimed that the fees were payable in pursuance of the Agreement made before 1st April, 1976, an approved by the Central Government and as such the said fees were not chargeable under the proviso of Expln. 1 to s. 9(1)(vii) of the Act. The ITO was, however, of the opinion that the design contract executed on 18th April, 1980, was a new agreement made after 1st April, 1976, and, therefore, “the amount payable to the assessee by the resident in respect of services rendered under the contract are taxable under the provisions of s. 9(1)(vi) and 9(1)(vii)”. He also did not accept the assessee’s contention that these amounts were not taxable in view of para. 5 of Art. III of the Agreement for Avoidance of Double Taxation between India and the Federal German Republic (hereinafter referred to as the Agreement).

On appeal CIT(A) upheld the finding of the ITO that the amounts remitted to the assesseecompany are in the nature of royalty and not exempt from taxation, The assessee approached the Tribunal. The learned Tribunal also upheld the decision of the CIT(A) by holding: “As such, we agree with the lower authorities that the agreement dt.

18th April, 1980, is a new agreement. Therefore, the proviso to s. 9(1)(vi) of the Act is not applicable to the instant case and the assessee cannot claim that the amounts receivable under this agreement is not to be treated as income of the assessee. On a careful consideration of the materials on record, facts and circumstances of the case, we hold that the assessee is not entitled to the benefit of the proviso to s. 9(1)(vi) of the Act.”

4. The assessee-company made an application for the Tribunal for reference under s. 256(1) of the IT Act, 1961, and the Tribunal having been satisfied that the points involved substantial question of law made the reference as above.

5. All the points are interlinked and stem from the same question whether the remittances should be treated as royalty or fees for technical services.

6. It cannot be disputed that by virtue of the last agreement of 1980 between the assesseecompany and the HRBC the role of assessee was reoriented from check consultant to prime consultant.

7. This agreement was entered into after a gap of two years without any indication in the agreement itself that it is a continuation of earlier agreement dt. 19th July, 1974, which should be evident from the following paragraph of the contract: “And whereas HRBC awarded LuA a separate consulting contract on 19th July,1974 and subsequently amended by a supplementary contract covering the supervision services to be carried out in Calcutta during construction of substructure and superstructure of the bridge and which contract shall be brought into force with effect from the date mutually agreed upon.”

8. Sec. 9(1)(vi) provides that the income by way of royalty payable by resident is taxable and s. 9 (1)(vii) makes income by way of fees for technical services payable by the resident taxable. The proviso to s. 9(1)(vi) and s. 9(1)(vii) exempts income by way of royalty or by way of fees for technical services payable in pursuance of agreement made before the first day of April, 1976 and approved by Central Government. Therefore, the argument of Dr. Pal appearing for the assessee that the contract of 1980 is the continuation of the contract dt. 19th July, 1974, which was approved by the Central Government and as such not chargeable under the proviso mentioned above is not acceptable by us. By the reason of our finding that the design contract executed on 18th April, 1980, is a new agreement we hold that remittances received by the assessee are taxable in India. Thus, the question No. 1 under reference is answered in the affirmative. The next question is whether the transfer of drawings, designs and technical services under the collaboration agreement constituted an out and out transfer of such rights and as such the sums received therefor could not be treated as royalty for the purpose of the Indo-German Double Taxation Agreement and liable to Indian income-tax. It has been contended by Dr. Pal that the assesseecompany did not retain any propriety right of the designs, drawings and technical services and as such there was an out and out transfer and the said amount in question did not constitute royalty as understood in the ordinary acceptance of the term. It was further contended that the said sum constituted “industrial and commercial profit” within the meaning of the Indo-German Double Taxation Agreement, the said sum is not assessable in India, in view of the admitted position that the assessee has no permanent establishment in India within the meaning of the said Agreement. It was further contended that the term “royalty” is to be understood in its ordinary sense, in the absence of any definition under the Double Taxation Agreement and the definition of “royalty” appearing in Expln. 2 to s. 9(1)(vi) of the IT Act cannot be applied for interpreting the said expression.

9. In para. 4.3 of the agreement dt. 18th April, 1980 it is stated : “All original documents prepared by LuA in connection with the works are the property and copy rights of LuA and HRBC shall not be entitled, either directly or indirectly to make use of such documents for the carrying out of any work beyond the works to which this contract relates, without the prior consent of LuA which consent however shall not be unreasonably withheld.”

10. In Expln. 2 of s. 9 royalty has been defined so as to include the following: “(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copy right literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-cls. (i) to (v).” Admittedly, royalty was not defined in the agreement for avoidance of Double Taxation between India and Germany and the term royalty was not included within the term industrial and commercial profits and the term royalty not being included in the agreement for avoidance of Double Taxation and had the present contract of 1980 being a continuation of the design contract of 1974 the assessee would not have been liable to pay income-tax in respect of the remittances received by it. Therefore, royalty having not been included in the Double Taxation Avoidance Agreement as also in the contract of 1974 the statutory definition has to be made applicable in computation of income-tax. The definition of royalty as given in several judicial decisions completely agree with the term of agreement as provided in para 4.3 mentioned above.

In CIT vs. Devy Ashmore India Ltd. (1991) 190 ITR 626 (Cal) : TC 30R.78. Their Lordships had the occasion to consider the definition of royalty as given in the agreement for avoidance of Double Taxation between India and the U.K. Their Lordships observed: “It appears, therefore, that the term ‘royalty’ has been defined in the agreement to mean, inter alia the payment of any kind including rentals received as consideration for the use of or the right to use any patent, trade mark, design or model, plan, secret formula or process. Therefore, what is important to consider is that, in order that a payment may be treated as royalty for the purposes of Art. XIII of the Agreement for Avoidance of Double Taxation between India and the U.K., the person who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In other words, where the transferor retains the property right in the designs, secret formula, etc. and allows the use of such right, the consideration received for such user is in the nature of royalty. Where, however, there is an outright sale or purchase, as in the present case, the consideration is for the transfer of such designs, secret formula, etc. and cannot be treated as royalty.” Their Lordships further held that the definition of royalty as provided in cl. 3 of Art. XIII of the Double Taxation Agreement between India and the U.K. a different meaning to the term royalty has been provided and it is different from the meaning given to term royalty in Expln. 2 to s. 9(1) (vi) of the IT Act, 1961. In such a case it was held that in determining the liability of a non-resident company, if there is any Agreement for Avoidance of Double Taxation entered into under s. 90 of the IT Act, 1961, the said agreement must prevail over the provisions of the IT Act; otherwise, there was no point in entering into any agreement for avoidance of double taxation. The facts of that case stand distinguished from the present case inasmuch as royalty was not defined in the agreement for avoidance of double taxation between India and Germany and as such the statutory provision will prevail.

From the discussion made above we hold that the sums received by the assessee for design and technical services for the construction work are in the nature of royalty which is taxable under IT Act, 1961 and does not constitute industrial and commercial profits and as such the fact that the assessee has no permanent establishment in India is of little consequence. It has already been held by us that the agreement dt. 18th April,1980, cannot be treated as a continuation of the agreement dt. 19th July, 1974, but the separate agreement and the sum received by the assessee is liable to be assessed under IT Act, 1961, and is not saved by the proviso to s. 9(1)(vi) of the Act. Therefore, the answer to the questions 1 and 2 under reference are rendered in the affirmative and to questions 3 and 4 are rendered in the negative. We also hold that the sums received by the assessee in the instant case do not constitute “fees for technical services” and is chargeable to income-tax as a royalty. The question No. 5 is thus answered accordingly.

The application under s. 256(1) is thus disposed of.

[Citation : 249 ITR 418]

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