1. These are three appeals by the assessee against the consolidated order of the CIT (A), dated 10-7-1985. Most of the grounds raised in all these three appeals are common grounds. These appeals are, therefore, dealt with and disposed of by a consolidated order.
2. The appellant here is M/s. Atlas Copco MCT AB assessed to tax as a non-resident company. The company has been taxed for these three years on royalties amounting to Rs. 4,46,570, Rs. 4,80,834 and Rs. 4,52,158 receivable by it as royalties under Clause 1(b) of the agreement entered into by it with M/s. Atlas Copco (India) Ltd. Such assessment has been confirmed by the CIT (A) whose order is now challenged before us. Shri S.E. Dastur, learned counsel for the appellant firstly took us painstakingly through the agreement that the appellant had entered into with M/s. Atlas Copco (India) Ltd. at Stockholm on 25-3-1977. He argued that Clause 2 of the agreement provided that the appellant company (hereinafter referred to as Swedish company) shall supply to M/s. Atlas Copco (India) Ltd. (hereinafter referred to as Indian company) know-how for use, application and exploitation. Shri Dastur argued that the know-how imparted, disclosed and supplied in terms of this clause was to become the absolute property of the Indian company and the payment for supply of such know-how was provided for in Clause 7 (a) of the agreement fixed the consideration equivalent of Rs. 15,00,000 for initial disclosure and supply of know-how which was to be paid in three instalments as described in that clause. Shri Dastur then referred to Clauses 3 and 4 and argued that in terms of these clauses, the Swedish company was required to provide services in various fields such as selection of personnel, training of Indian personnel, deputation of Swedish personnel to Indian company etc. Shri Dastur then referred to Clause 5 of the agreement and pointed out that the nature of the service which the Swedish company was required to render in terms of this clause was related to the supply of technical know-how as per Clause 2, because in terms of this clause, the Swedish company was required to disclose benefits of improvement, modification and research made by the Swedish company relating to the manufacture of the products and improvements and research in the know-how or technical information etc. Shri Dastur then pointed out that the payment that was required to be made by the Indian company to Swedish company in terms of Clause 7(b) of the agreement, though described as a royalty, was in fact not a royalty which could be brought to tax in India. He argued that the expression "all other obligations" used in Clause 7(b) referred to the services that the Swedish company was expected to render in terms of Clauses 3 and 4 and perhaps 5. Payment under Clause l(b) was for such services and could not be described as royalty within the meaning of article VII of the Double Taxation Agreement between India and Sweden.
Objecting to the finding of the CIT (A), Shri Dastur pointed out that the CIT (A) erred in rejecting the contention of the appellant that the provisions of the double taxation avoidance agreement between India and Sweden should prevail over the provisions of Section 9(1)(vi) of the Income-tax Act. Shri Dastur in support of his argument that the provisions of the double taxation agreement were binding and had a over-riding effect as compared to the provisions of the Act relied on 137 ITR page 1 (Statutes) and CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP). The main burden of Shri Dastur's argument was that the payment made under Clause 7(b) was for services described under Clauses 3 and 4 and such payment was for advice and services as provided for in that clause and, therefore, it could never be described as royalty. Even if such payment was considered as for services provided for in Clause 5, what was provided in Clause 5 had reference to what was provided in Clause 2. Since the consideration for Clause 2 was embedded in Clause 7(a), the services in respect of Clause 5 were also provided for in Clause 7(a). Even assuming that services in Clause 5 were considered for payment under Clause 7(6), such payment could not be for royalty because what was provided for by Clause 5 was not for right to use technical know-how. Clause 5 ensures supply of information about improvement, research etc. and the services rendered under Clause 5 become the property of the assessee and, therefore, even if a portion of payment under Clause 7(b) were to be considered as for what was provided in Clause 5, it could not be considered as royalty. Shri Dastur then argued that Explanation 2 to Section 9(1)(vi) gave a very wide definition "of the term "royalty" whereas the same expression was given a restrictive definition in Article VII of the Double Taxation Agreement. Even assuming that Section 9(1)(vi) was to be applied, the payment made in terms of the present agreement could not come under any of the sub-clauses of Explanation 2 to Section 9(1)(vi). Sub-clause (0 spoke of transfer of all or any rights in respect of a patent, invention etc. and Sub-clause (v) also spoke of transfer of all or any rights in respect of any copyrights. These clauses were not applicable in the present agreement. Sub-clauses (it), (Hi) & (iv) which talk of imparting of any information concerning the working of or the use of patents or use of patents, secret formula etc. or information concerning technical, industrial, commercial or scientific knowledge were the types of services which were described in Clause 5 of the agreement, and the payments made, under Clause 7 if relatable to services render under Clause 5 could not correctly be described as royalty in the true sense of the terms.
3. Objecting to the CIT(A)'s reliance on Clause 10 of the agreement, Shri Dastur argued that there was no provision for return of documentation. Also there was no clause for user of know-how. What was provided in Clause 2 of the agreement was absolute ownership of the know-how which were transferred by Swedish company to the Indian company and such absolute ownership, argued Shri Dastur, was not inconsistent with restrictions on transferring the know-how. Shri Dastur then referred us to Article VII of the Double Taxation Agreement and argued that the source of the payment of royalty was not in India and, therefore, what was described as royalty could not be brought to tax under Article VII. He relied on CIT v, Lady Kanchanbai [1962] 44 ITR 242 (MP), CIT v. Lady Kanchanbai [1970] 77 ITR 123 (SC) and Firs/ ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Bom.) in support of his interpretation of the term "source", namely, source should mean what a common man would regard as a source. He finally argued that if the source of payment of royalty is the agreement, the agreement was signed at Stockholm, the research and development was done outside India and, therefore, the source of the royalty was outside India.
4. Shri P.K. Sridharan, learned Departmental Representative relied on the order of the CIT (A). He argued that the agreement between Swedish company and the Indian company had to be read as a whole. The royalty was paid to help the Indian company to use the technical know-how. Shri Sridharan relied on N.V. Philips v. CIT [1988] 172 ITR 521 (Cal.). In reply, Shri Dastur pointed out that this decision was not concerned with Double Taxation Agreement but Section 9(1)(vi).
5. We have considered the submissions made by Shri Dastur and those by Shri Sridharan, learned-Departmental Representative and have gone through the relevant agreement as well as the provisions of the Double Taxation Agreement between India and Sweden. Before dealing with the various arguments advanced by Shri Dastur, we will reproduce Clause 1(b) in terms of which the payment has been made by the Indian company to the Swedish company. This clause reads as under: 7(b) In consideration of all other obligations undertaken by the Swedish Company under or in pursuance of this Agreement and in particular the continuing obligations undertaken by the Swedish Company to update drawings etc. the Indian company shall pay to the Swedish Company a royalty at 3 per cent subject to applicable taxes, if any, on internal sales and at 6 per cent subject to applicable taxes on exports for a period of five years from the commencement of commercial production. This royalty will be calculated on the basis of the net ex-factory sale price of the products exclusive of excise duties minus the landed cost of the imported components, irrespective of the source of procurement including ocean freight, insurance, custom duties etc. In addition, for the purpose of computing royalty payments, the main standard bought out components shall be excluded. The payment of royalty at the rate mentioned above will be restricted to the existing licensed capacity of the plant per annum plus 25 per cent in excess thereof. In case of production in excess of this quantum, the prior approval of the Indian Government will have to be obtained regarding the terms of payment of royalty in respect of such excess production.
6. The first thing that is clear on a plain reading of this clause is that it provides that the Indian company shall pay to the Swedish company a royalty. This royalty is calculated at 3 per cent on internal sales and at 6 per cent on exports. It is to be paid for a period of five years from the commencement of commercial production and is to be calculated on the basis of net ex-factory sale price of the products exclusive of excise duties. Further, such payment is restricted to the existing licensed capacity of the plant per annum plus 25 per cent in excess thereof. Basically, therefore, what is paid by the Indian company to the Swedish company is royalty on sales and such payment is made in consideration of all other obligations undertaken by the Swedish company under or in pursuance of this agreement. The question for our consideration is what are these obligations and whether the payment made in terms of such obligations can truly be considered as royalty or whether there is anything to suggest that what is described in this clause as royalty is in fact not a royalty payment.
7. It was Shri Dastur's argument that what is paid in terms of Clauses 3 and 4 of the agreement is for services rendered and cannot come within the definition of the term 'royalty'. These clauses read as under : (a) Advice in preparing general plans, designs, basis, layouts elevations, detailed drawings and plans, and other diagrams and specifications as may be required for the establishment and setting up of the manufacturing plant including and incorporating such special features as may be required or suitable for operating conditions at the site : (ii) provide engineering inspection outside the territory at manufacturers' or vendors' plants as and when considered necessary by the Swedish Company to ensure compliance with the plan and specifications, and to do all other acts, deeds matters and things necessary for expediting manufacture and delivery; (iii) procure all such licences and permits as may be required for export to the territory; of the plant, machinery and equipment including spares, tools, materials and other items which may be required by the Indian Company from outside the territory for establishing the manufacturing plant; (c) assist and advise the Indian Company in selecting and obtaining technical and other personnel to be employed by the Indian Company from outside the territory; (d) assist and advise the Indian Company to enable it to manufacture the Products as far as possible from the raw materials available in the territory; (e) assist and advise the Indian Company in developing the products covered by this Agreement to suit Indian conditions; (g) generally assist ;and advise the Indian company in matters relating to the efficient operation and maintenance of the manufacturing plant; and (h) supply to the Indian Company free of charge specimens of such samples, displays, sales promotional material and literature as the Indian Company may reasonably require or as in the Swedish Company's opinion may be of use to the Indian Company in the preparation by the Indian Company of their own sample, display materials and literature for sales promotion and sale of the products.
4. (a) The Swedish Company shall impart at its or its associate Companies plants in Sweden or elsewhere outside the territory to the representatives of the Indian Company in such number and for such period of time as may be mutually determined by the parties hereto, provided that the Indian Company shall bear the cost of fares and stay abroad, such training as may be of assistance to the Indian Company in the establishment, setting up commissioning, efficient operation and maintenance of the manufacturing plant and in assembly and manufacture of the products, operational techniques, and after sales service, (b) The Swedish Company shall depute their technicians to the Indian Company in such manner and for such period of time as may be determined by the parties hereto and the Indian Company shall bear the cost of air fares and expenses for staying in India, for training the Indian personnel and to assist the Indian Company in the efficient operation and maintenance of the manufacturing plant and in the development of the products.
(c) The cost charges and expenses to be incurred in deputing representatives and technicians as mentioned in Sub-clauses (a) and (b) hereof and also the number of such representatives and technicians, the rate of allowance to be paid to them, and the period of their stay in India or Sweden, as the case may be, shall be subject to the approval of the Government of India.
The expressions used in most of the sub-clauses are "assist" and "advise". Further, Clause 2 clearly speaks of 'use, application and exploitation' and the know-how in the Indian territory. This clause reads as under: 2. (a) The Swedish Company shall impart, disclose and supply to the Indian Company the know-how for use application and exploitation in the territory. The know-how and all documents data drawings and specifications relating to the know-how shall be delivered, imparted, disclosed and supplied by the Swedish Company from outside the territory. On the know-how being imparted, disclosed and supplied the same shall become the absolute property of the Indian company. The know-how shall be furnished in the English language.
(b) The Swedish Company represents warrants and guarantees that the know-how supplied shall be an adequate basis for the Indian Company to achieve production capacities, standard and quality of the products and raw materials and utilities consumption comparable to those achieved by the Swedish Company at its plants in Sweden.
Now the payment that is made under Clause 7(a) represents consideration for the initial disclosure and supply of know-how as can be seen from the wording of the following Clause 7(a): 7. (a) In consideration of the initial disclosure and supply of know-how from outside the territory by the Swedish Company under this Agreement, the Indian Company shall pay to the Swedish Company, in Sweden, in Swedish currency, a lump sum consideration equivalent of Rs. 15,00,000 (Rupees fifteen lakhs) in three instalments as detailed below: Therefore, what is paid under Clause 7 (a) as lump sum consideration is only for initial disclosure and supply. Now Clause 2(a) requires the Swedish company to impart, disclose and supply know-how for use application and exploitation in the territory. We cannot give a restrictive meaning to Clause 2(d) and say that it provides only for supply of know-how. All the clauses of the agreement have to be read as a whole. It was the burden of Shri Dastur's argument that the term 'royalty' must mean payment for use of know-how, patents, rights, designs etc. or any other like property. It was also the burden of Shri Dastur's argument that the obligations undertaken by the Swedish company did not come within the scope of Article VII of the Double Taxation Agreement. These obligations were described in Clauses 3 and 4 and were primarily in the nature of services rendered and the payments made for services in terms of Clauses 3 and 4 for selection of personnel, their training, deputation of foreign personnel could not be equated with use of know-how, patents etc. We are not prepared to give such a restrictive meaning to Clauses 3 and 4 of the agreement. We are further not prepared to accept that the expression "in consideration of all other obligations" only covers Clauses 3 and 4 and the portion of Clause 5. When the Swedish company gives advice in preparation of general plans, designs, layouts, drawings etc., it is also assisting user of such pians by the Indian company. The advice 1 in selection and procuring machinery and equipments, providing engineering inspection and procuring licences and permits as may be required for export to the territory; of the plant, machinery and equipment including spares, and tools is all calculated to assist the Indian company in making case of the know-how received. The Swedish company was required to assist the Indian company in selection of technical and other personnel, in manufacturing the products from raw material available in the territory; in developing the products covered by the agreement; in marketing the products and in matters relating to efficient operation and maintenance of the manufacturing plant. Such advice and assistance was to enable the Indian company to use the technical information and know-how provided by the Swedish Company. With, the same object, Sub-clause (A) of Clause 3 of the agreement provided for supply to the Indian company free of charge specimens of samples, displays, sales promotional material and literature as the Indian company may require or as in the Swedish company's opinion may be of use to the Indian company in the preparation by the Indian company of their own sample, display materials etc. All these services are calculated to assist the Indian company in the use of the know-how. The training of the representatives of the Indian company provided in Clause 4 was also with the intention of assistance to the Indian company in the establishment, setting up, commissioning, efficient operation and maintenance of the manufacturing plant. We are, therefore, not prepared to accept Shri Dastur's argument that the payments in terms of Clauses 3 and 4 were only for services rendered and did not help the Indian company in the use of patents and rights. The assistance provided by the Swedish company in all these areas was for enabling the Indian company to use the know-how supplied. The assistance was in every area of activity of the Indian company. It was for selection, for training etc. Further, we are not prepared to accept that what was provided by the Swedish company in terms of Clause 5 could be related to what is provided in Clause 2(a). Clause 5 read as under: 5. The Swedish Company shall from time to time supply, impart and disclose from outside the territory the benefits of any improvement modification and research made by the Swedish Company and its associate companies relating to the manufacture of the products and in particular shall supply impart and disclose any modification, improvement and research in the know-how or in any technical information, advice, assistance or services rendered or given by the Swedish Company to the Indian Company under or in pursuance of this Agreement and for that purpose supply all designs, drawings, specifications, layouts, diagrams, and other materials and execute all documents as may be necessary. Such modification improvement and research shall be used applied and exploited by the Indian Company only in the territory. In the like manner, the Indian Company shall supply, impart and disclose to the Swedish company the benefits of improvement, modification and research for use application and exploitation outside the territory and for that purpose supply all designs, drawings, specifications, layouts, diagrams and other materials and execute all documents as may be necessary, The Swedish company under this clause from time to time was required to supply, impart and disclose the benefits of improvements, modifications and research. This clause provided that such modifications, improvement and research shall be used, applied and exploited by the Indian company only in the territory. The Indian company was required to conform to the technical advice tendered by the Swedish company from time to time and shall follow the quality control methods prescribed by the Swedish company in the course of manufacture, use and marketing of the products. The Indian company was required to submit samples of the products manufactured by the Indian company to the Swedish company and alternatively, the Swedish company would depute its representatives to India for check on quality of products. This was provided in Clause 6 of the agreement. The other obligations which are mentioned in Clause 1(h) cover all the obligations of the Swedish company which come under Clauses 2, 3, 4, 5 and 6 and we are not prepared to accept that such obligations were restricted to providing services to the Indian company. Further the description of the payment in Clause l(b) itself is material. Such payment is termed as royalty. It is to be calculated on the basis of the ex-factory sale price and is to be restricted to the existing licence capacity' of the plant plus 25 per cent in excess thereof. It is difficult to accept Shri Dastur's argument that the payment which is described as royalty calculated at a percentage of sale price and which is restricted to the licence capacity and is, therefore, linked with the production of the Indian company should not be treated as royalty.
8. We will not see whether there is anything in Article VII of the Double Taxation Agreement which supports the various arguments made by Shri Dastur in this behalf. This Article reads as under: Article VII - Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory.
In this article, the terms 'royalty' means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, 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, or in respect of cinematographic films.
Firstly, Shri Daslrur tried to argue that the source of the royalty was not India but Sweden. We are not prepared to accept this argument. The royalty is derived by the Swedish company (resident of one of the territories) from the Indian company. Clause l(b) clearly mentions that the Indian company shall pay to the Swedish company and such payment is for all other obligations undertaken by the Swedish company. These obligations are described in Clauses 2 to 6 of the agreement and cover a large spectrum of the activities of the Indian Company. Generally, these obligations are in the nature of assistance and advice to the Indian company in every field of production. This assistance and advice is rendered with the intention to enable the Indian company to make full use of the technical know-how that the Swedish company intended to provide. Clause 6 even provides for control by the Swedish company over the Indian company to ensure that the Indian company conforms to the technical advice tendered by the Swedish company. It also provides for Swedish company to depute its representatives to India for checking quality of products. When for all these services the payment is made by the Indian company, it is far-fetched to suggest that the source of such payment is in Switzerland itself. When the payment clause specifically states that in consideration of the obligations undertaken by the Swedish company the Indian company shall pay to the Swedish company a royalty, we cannot accept an interpretation that the source of such payment is the Swedish company itself and not the Indian company.
9. Shri Dastur referred to other Double Taxation Agreements with countries like Belgium, Japan etc. to elaborate on his argument about what constitutes the source of royalty. He also argued that if the source of the payment is agreement, then the payment should be deemed to have been made in Stockholm. We do not consider it necessary to go to other Double Taxation Agreements for this purpose. We have stated at length that the language of Clause lib) of the agreement makes it very clear that the royalty is paid by the Indian company to the Swedish company and, therefore, the source of the royalty is clearly, on a plain reading of this clause, the Indian company which is in India and any interpretation which suggests that the Swedish company had entered into an agreement to receive royalty from the Swedish company itself would be an interpretation bordering on absurdity. Finally, in Article VII itself the expression 'royalty' has been described as royalty or other like amount received as consideration for right to use copyrights, patents, etc. In the present case what is paid under clause lib) is described in the agreement as royalty. It is paid in consideration of the other obligations undertaken by the Swedish company and enables the Indian company to make use of the expertise and assistance offered by the Swedish company. We are, therefore, satisfied that even within the meaning of the Article VII of the Double Taxation Agreement, the payment received by the appellant under Clause 7(b) is royalty.
10. Finally we will briefly deal with the Board's Circular No. 333 dated April 2,1982 reproduced at 137 ITR page 1 (Statutes) which clearly supports the arguments of Shri Dastur that the provisions of Double Taxation Agreement should prevail over the provisions of the Act. That is also the burden of the decision of the Andhra Pradesh High Court in Visakhapatnam Port Trust's case is supra. We, therefore, agree that Articles III and VII of the Double Taxation Agreement will have to be taken into account for considering the question of what constitutes royalty and further the question whether the amount received by the Swedish company is taxable as royalty in its hands. For the reasons stated in the preceding paragraphs, we are of the view that the amounts received by the Swedish company under Clause lib) of the Agreement are taxable as royalty even within the meaning of that terms as it appears in Article VII of the Double Taxation Agreement. Shri Dastur had relied on CIT v. Lady Kanchanbai [ 1962] 44 ITR 242 (MP) and CIT v. Kanchanbai [ 1970] 77 ITR 123 (SC) in support of whatever arguments he had advanced regarding the interpretation of the expression 'source'. We have gone through these decisions. In CIT Lady Kanchanbai [ 1962] 44 ITR 242 (MP), the facts were quite different. The court was called upon to interpret the expression "where in respect of a particular source of income, profits and gains, an assessee has once been assessed" in Section 2(/7)(i)(") of the Indian Income-tax Act, 1922. That expression, the court held, implied that the income, profits and gains of a particular source had been computed in the manner laid down in the Act and included in the total income. The assessment was on the total income and there could not be an assessment in respect of a particular source of income, profits and gains unless the income, profits and gains therefrom were included in the total income. This finding is no doubt relevant in the context in which it was given. In the present case, we are concerned with the term 'source' in a different context.
The term used is 'source in the other territories' and has to be read along with the earlier words "royalties derived by residents of one of me territories".The use of the word 'source' in the Double Taxation Agreement is to be considered and understood in the context of that agreement. The expression used in Article VII is "royalties derived by a resident of one of the territories from sources in the other territory". This covers payments made by a company in one territory to a company in other territory in accordance with an agreement that may have been reached between the two companies. The decision of the Madhya Pradesh High Court in the case of CIT v. Lady Kanchanbai [1962] 44 ITR 242 does not, in our opinion, really advance the case of the appellant.
For the same reason, the other decision relied upon by Shri Dastur in CIT v. Lady Kanchanbai [1970] 77 ITR 123 (SC) also, in our opinion, does not, in any way, make any difference to the finding given above.
Because this decision was also given while interpretating the same expression in proviso to Section 2(77)(i)(a) of the Indian Income-tax Act, 1922. The Supreme Court held therein that Section 2(7 l)(i)(a) does not refer to the income of the assessee generally but to his separate source of income, profits and gains and that it is possible for an assessee to have a different previous year for each separate source of income, profits and gains. In both the decisions, the Courts were concerned with the term 'source of income' in the contexts of the language of Section 2(7)(f)(a) of the Indian Income-tax Act, 1922.
This, in our opinion, does not, in any way, support the interpretation of the appellant's counsel he tried to put on the term 'sources' used in Article VII. Shri Dastur also referred to the decision of the Tribunal in Automobile Peuggeot' s case (supra). We have carefully gone through this decision and fail to see how it helps the appellant's case. In that case, there was an agreement for transfer of technology for use in India. The Tribunal held on the facts of that case that the source was the user of the technology or its exploitation and since the user or exploitation took place in India, the source of royalty was in India. It may be mentioned here that in that case also an effort was made to refer to Double Taxation Agreements with Belgium and Japan and such effort was rejected by that Bench by pointing out that the fact that under those agreements, there was a provision which stated that royalty should be deemed to arise in a contracting State when the payer was in that State and there was no such provision in the agreement between the two countries does not make any difference. As stated by the Tribunal there, the issue has to be decided independently and without reference to the D.T. Agreements with other countries. The Departmental Representative relied on the decision of the Supreme Court in the case of Performing Right Society Ltd. v. CIT [ 1977] 106 ITR 11.
This decision seems to support the case of the Revenue. In that case, under an agreement executed in England, the Performing Right Society, which was an association of composers, authors and publishers of copyright musical works received in England royalties from the Govt. of India for broadcasting western music from the stations of All India Radio. The Society collected its royalties and after deducting the expenses distributed it to the members in proportion to the member's work publicly performed. The Society claimed that the royalties received under the agreement were not liable to tax in India and the royalties realised were not really the income of the society. The Supreme Court held on these facts that the royalties received from the Government of India under the agreement for broadcasting from the stations of All India Radio accrued or arose to the Society in India and that the royalties payable to the Society under the agreement is its income. The Supreme Court also held that the question as to 1991] IAC v. Corning Glass Works, USA (Bom.) 339 the source of the income is not relevant for the purpose of ascertaining whether the income accrues or arises in India, because Section 5(2) provides that all income from whatever source derived is to be included in the total income of the non-resident. We would, therefore, hold that the payments receivable by the Swedish company under Clause l(b) of the agreement between it and the Indian company are royalties within the meaning of Article VII of the agreement. They are payments received from sources in India which is the Indian company. They are amounts received for assisting the Indian company in use of the technical information and know-how that the Swedish company supplied to it and the assessment of such royalties in the hands of the Swedish company has been rightly confirmed by the CIT(A).
11. In the result, all the three appeals of the appellant are dismissed.