ORDER
Diva Singh, J.M.
This is an appeal filed by the revenue against the order dated 4-11-1993, of Commissioner (Appeals)-I, New Delhi. It pertains to the assessment year 1989-90,
2. The revenue has raised the following grounds before us :
'On the facts and the circumstances of the case, the learned Commissioner (Appeals) has erred in deleting the amount of Rs. 1,11,33,650 representing payments for the user of the rights, know-how technology, etc., despite the definition of royalty in article VIIIA of DTA and the facts of the case being different from M/s. DCM Ltd. relied upon.'
3. Learned Departmental Representative places strong reliance on the assessment order and invited our attention to page 3 of the same. It was submitted by her that the issue revolves around the finding whether the transaction is a case of transfer of technology or user of technology and the assessing officer has made a categorical finding after examining the issue in detail that this is a case of user of technology and as such it is taxable. It was contended by her that there was no dispute over the fact that the provision of the Double Tax Avoidance Agreement between India and Federal Republic of Germany would override the provision of section 9 of the Income Tax Act and merely because the payment was a lump sum payment, it cannot be said that it was made for transfer of technology. It was further argued by her that the Commissioner (Appeals) at page 4 of the impugned order had not discussed the critical portion of the agreement by which the technology was conveyed and the relief had been granted by him by placing reliance only upon the decision of the Delhi Bench of the Tribunal in the case of DCM Ltd. v. ITO (1989) 29 ITR 123 . It was her contention that the facts of the said case were distinguishable from this case and as such not applicable to the issue at hand. It was argued by her that the assessed says that clause III of the agreement between the assessed and M/s. Apollo Domain Computers, GmbH, Germany, is for the right to user. Hence, the amount was taxable in India.
4. Our attention was invited by the learned Departmental Representative to the paper book page No. 1 for the contention that the approval is obtained by the assessed from the Government of India where the payment has been described as a 'fee'. Special reference was made to clause (ii) of the said letter from the Government of India, Ministry of Industry to M/s. HCL Ltd., the assessed before us which reads as under :
'(ii) Lump sum know how fee : US Dollar 11 lakhs of taxes with tax liability to be borne by the Indian Company.'
4.1. On the basis of this, the contention was put forth that the same is the lump sum know-how fee and the assessed has at the time of obtaining the approval, not clarified to the Government of India that it is not a 'fee' but a payment for transfer to technology which is what the assessed is trying to pass it off now. It was argued by her that the word 'fee' connotes the right to user. The terms clearly shows that the payment is not on account of sale or transfer of technology. Thus, since the approval got from the Government of India was clearly for 'fee' i.e. for user of the technology, consequently it cannot be accepted that it was a case of transfer of technology.
5. Our attention by the learned Departmental Representative was further invited to the paper book page Nos. 3 to 44 filed by the assessed which is the 'technology transfer and technical assistance agreement' between the Apollo Domain Computers GmbH and the assessed. On the basis of this it was contended by her that each and every aspect is written in such a way which clearly does not support the finding of the first appellate authority that this was a case of outright sale because if this was so then it would not have been necessary to 'hedge' the agreement in so many aspects as the various clauses adverted to before us show. It was further argued that the kind of watch Apollo Domain is keeping on the factory premises to market etc., and stringent conditions and requirements pertaining to approval of Apollo Domain at each and every level and stage merely shows that the transfer was only limited to user and was not a case of outright sale. It was vehemently argued by her that in the case of DCM, no such conditions had been applied and as such the two cases were not comparable.
6. On the interpretation of the terms used in the agreement, it was contended by her that simply using the word 'conveyed' does not clinch the issue. Various other factors like the confidentiality clause, the fact that there was a limitation period of 5 years, are also relevant to decide the issue. The watch on the factory premises, the watch on the production schedule etc., kept by the Apollo Domain clearly shows that it was not intended to be a case of ourright sale or purchase. It was argued by her that the word, transfer, implies ownership rights to the assessed which a reading of this document shows have not been conveyed to the assessed. Our attention was invited to paper book page No. 16 on the basis of which it was argued that clause 6.1 shows that the rights were granted only for the user of technology and nowhere is there any implication that there was any permanent handing over of design etc., to the assessed and in fact, it was argued that this limited handing over for the user can also be taken away by the Apollo Domain Company. Thus, it was argued that on reading the entire agreement it was evident that the transfer is limited to user of technology. Merely because the word 'granted' has been used in clause 6.1, it does not mean that a permanent right is acquired by the assessed. It was again reiterated by her that at the time of seeking the approval of the Government of India the assessed does not use the words payment for transfer or purchase and specifically use's the word 'fee' which denotes a payment for user of technology. It was also contended by her that the law of natural construction should be used to understand the meaning and the term used by the assessed and argument put forth by them would amount to saying that 'A' means 'Z' and not that 'Z' should ordinarily be understood to mean A and there is nothing on record to show why 'A' should not mean 'A' it was argued.
7. The contention as such was that the case of DCM Ltd. relied upon by the Commissioner (Appeals) for granting relief in 29 ITD 123 (supra) distinguishable and not applicable to the facts of the case. Further reliance was placed on the following decisions for the right to user of technology, namely :
1. ITO v. Automobile Peugeot (1989) 30 ITD 329 (Bom-Trib));
2. Atlas Copco, AB of Sweden v. Dy. CIT (1995) 53 ITD 293 (Bom-Trib);
3. ADC v. Daimler Benz AG West Germany (1991) 36 ITD 508 (Bom-Trib);
4. Dy. CIT v. Majestic Auto Ltd. (1994) 51 ITD 313 (Chd-Trib);
5. N.V. Phillips v. CIT : [1988]172ITR521(Cal) ;
6. Siemens Aktiengesellschatt v. ITO (1987) 22 ITD 97 (Bom-Trib) (SB); and
7. CIT v. Ahmedabad Manufacturing & Calico Printing Co. : [1983]139ITR806(Guj) .
8. The authorised representative of the assessed, on the other hand, places reliance on the impugned order. It was submitted by him that although the learned Departmental Representative did not dispute the overriding effect of provisions of DTAA over section 9(1)(vi) of the Income Tax Act but nevertheless, he wanted to address the Bench over the issue.
9. It was submitted by him that DTAA will override with effect from 1-4-1972 over the definition of royalty as enumerated in section 9(1)(vi) of the Income Tax Act, 1961. Our attention was invited to page 47 of the paper book wherein article III 9(1)(vi) para 1 deal with the taxability of the business profit which are attributed to a permanent establishment' in the country. Our attention was invited to page 46 wherein in article 2 clause 1(h), the permanent establishment has been defined for the purposes of DTAA. The term royalty has been dealt with in article VIII-A and it was submitted that the royalty arising in India can be taxed in India as per clause (iii) of article VIII-A of the DTAA. It. was contended that the emphasis is on 'use of, or the right to use' and this is a much narrower and a truncated definition than the definition of royalty under the Income Tax Act, 1961 and this truncated definition does not hold in its scope that transfer of technology is royalty.
10. Thus, after adverting to the various articles and clauses of the DTAA agreement between India and the Federal Republic of Germany, it was contended by the authorised representative of the assessed that the assessed's case is of transfer of technology which goes back to article III of the DTAA and is governed by it on the basis of permanent establishment in India. It was contended by him that it has been disputed that Apollo Domain does not have a permanent establishment in India. Accordingly, this lump sum fee was not taxable. Reliance was placed on the following decisions for the proposition that this a case of outright transfer of technology and as such business profit, Citizen Watch Co. Ltd. v. IAC & Ors. : [1984]148ITR774(KAR) , CIT v. Davy Eshmore India Ltd. : [1991]190ITR626(Cal) , Graphite Vicarb India Ltd. v. ITO (1992) 43 ITD 28 (Cal) (Trib) (SB), DCM Ltd. v. ITO (supra), Swadeshi Polytex Ltd. v. ITO ; and Modern Threads (I) Ltd. v. Dy. CIT (1999) 63 TTJ (Jp) 601 : (TM).
11. It was also submitted by him that the assessing officer has placed reliance on the decision of the Bombay High Court in the case of Aziende Colorinazionali Affini, Italy : [1977]110ITR145(Bom) for the proposition that every agreement should be read as a whole. In response to this the submission made was that there is no dispute over the issue and as such this does not advance the case of the revenue. It was further contended that in the case of Calcutta High Court N.V. Phillips (supra). The decision is not relevant as there was no DTAA to be considered therein. Our attention was also invited to the decision of the Calcutta High Court in : [1991]190ITR626(Cal) (supra) relied upon by him wherein the question was in reference to the DTAA between India and U.K. which by and large are identical and their lordships of the Calcutta High Court therein considered the earlier decision rendered in the case of N.V. Phillips v. CIT (supra) relied upon by the revenue. On the decision of the Special Bench of the Bombay Bench of the Tribunal decision in (1987) 22 ITD 47 (Bom) (supra), it was submitted that although the assessing officer has relied upon the same and here the DTAA between Germany and India was considered but it does not advance the case of the revenue. Thus, the argument put forth was that in the said agreement technology is transferred. It was also contended that this is a composite agreement for transfer of technology and the contracting parties have very clearly used the word conveyance which means transfer. For this contention our attention was invited to clause 2.1 of this agreement. It was further argued that subcontracting is a different aspect of this agreement and the same is included in cl-3.1.1 of this document appended at page 9 of the paper book placed before us. Similarly, the confidentiality aspect has been dealt by article 4 of this agreement to which our attention was invited. Thus, on the basis of this the submission put forth was that in the case of DCM cited supra, the assessed could not duplicate the technology granted and the same was the case in Swadeshi Polytex (supra).
12. It was further argued that a clear reading of article 6 of this agreement shows that the intention of the parties all along was that technology was granted or conveyed for consideration. As far as the licensed product was concerned, they were separately considered in articles 6(i) and 6(ii), 6(iii), 6(iv). Thus, these different articles are part of the same composite agreement. Our attention was further invited to article 8 of this agreement which deals with the rights relating to the software programmes. The limitation imposed upon the parties in article 8.6, 8.7, 8.8, 8.9 etc., on which a separate consideration has been paid which has been included in the definition of royalty and subjected to tax. Thus article 12 was not related to technology and in fact is related to licensing and royalty on the licensed products manufactured was subjected to tax. Thus, dealing with the several issues etc., of the grant of license of software programmes, etc., the payment made have been taxed and only in respect of the payment for transfer of technology the assessed is claiming exemption from royalty.
13. Coming to the arguments of the learned Departmental Representative pertaining to the letter issued to the assessed by the Government of India where the term lump sum fee has been used, it was argued that the use of word 'fee' does not connote royalty. What is relevant here is that what is assessed getting from Apollo Domain and the nomenclature cannot determine the nature of this agreement and thus, the rights acquired by virtue of outright sale of technology cannot be interpreted to have rights acquired for user of technology. The words transfer convey clearly the intention of the contracting parties. Thus, the submission was that the entire agreement is a composite agreement.
14. Coming to the decisions relied upon by the learned Departmental Representative it was submitted that the legal proposition as laid down in (1989) 30 TTD 329 (Delhi) (supra) is not disputed but the submission was that each case proceeds on its own peculiar facts and as such this case was distinguishable.
15. It was further argued that (1995) 53 ITD 293 (Bom) does not advance the case of the revenue, similarly (supra) also does not help much.
16. Swadeshi Polytex, cited supra, on the other hand, it was contended fully supports the case of the assessed, facts and circumstances being identical. The contention was also put forth that the case of DCM Ltd. on which the Commissioner (Appeals) had relied fully supports the case of the assessed. Thus, it was contended that 'granted' means transfer.
17. The learned Departmental Representative in counter reply strongly contended that the assessing officer has categorically stated that there is no independent outright sale and the assessment order does not support the assessed, especially keeping in mind the fact that the transfer/user of technology to the assessed was specifically limited to a term of 5 years. His enjoyment of these rights was thus limited for the said period. It was argued by her that the agreement no doubt has many components but the entire agreement is valid only for five years which no doubt may be extended in certain circumstances.
18. Coming to article 3 of this agreement, it was submitted that clause 3.1.1 had the heading transfer of technology which is only a heading the contents of which clearly shows that user of technology is being parted with. The mere use of the word 'delivery' therein does not give the meaning that a transfer in the legal sense of the word has occurred. It was further contended by her that the authorised representative in the course of the arguments has submitted that Swadeshi Polytex (supra) fully supports the case of the assessed and the facts are identical, it was concluded by her that facts are distinguishable.
19. The learned Departmental Representative's contention was that the facts in the case before us are that there is limitation of 5 years beyond which the' Indian company cannot even use the technology. After 5 years, article 14 dealing with the duration and termination would come into effect and by virtue of article 14.4, sub-clause (a), all rights granted under this agreement would revert back to Apollo.
20. We have heard the rival submissions and perused the material placed on our files. The decisions cited before us have also been considered.
21. Right at the outset, it would be pertinent to state certain undisputed facts of the case. There is no dispute over the issue that M/s Apollo Domain Computers, West Germany entered into agreement of technical collaboration with M/s. HCL Ltd. The said agreement was executed on 11-5-1987. There is also no dispute over the Act that the definition of royalty as enumerated in the DTAA between India and Federal Republic of Germany is a truncated one and is not pari materia with the definition of royalty under section 9(vi) of the Indian Income Tax Act, 1961. There is also no dispute over the issue that by virtue of the existence of the DTAA between the India and Federal Republic of Germany. The provisions of the DTAA shall prevail over provisions of the Income Tax Act, 1961. Further, it is noticed that there is also no dispute that M/s. HCL Ltd. made an application to the Government of India, Ministry of Industry, Department of Industrial Development for foreign collaboration with M/s ADC, USA for the manufacture of processor based CAD/CAM work station.
22. The case of the assessed before the authorities below has been that according to the terms and conditions of this agreement M/s ADC Computers who had the ownership rights and technology of manufacture of computers and was entitled to transfer such technology including secret formula, secret process, designs, incentives etc., agreed to transfer such technology to HCL by separate clauses. In the agreement HCL was also given license for the user of technology for manufacturing the licensed products as defined in article 6.1 of the agreement. Clause 6.2 of this agreement provided for the mode of payment lump sum amounting to US $ 1.1 million in Installments. The case of the assessed has been that there were other clauses for other payments which related to the grant of license etc., and the payment made there under was subjected to taxes. In the relevant accounting period, the payments made relating to the lump sum payments were as under :
Dec. 1988 US $ 3,66,500 (equivalent to Rs. 56,24,000).
23. The submissions of the assessed before the assessing officer were not accepted and thus, this total payment of Rs. 1,11,33,650 has been assessed as royalty in the hands of the assessed who is the representative assessed of the German company relying upon the decision of the Bombay High Court in the case of Aziende Colorinazionali affini, Italy v. CIT (supra) and the decision of the Calcutta High Court in the case of N. V. Philips (supra).
24. The assessing officer held as under :
'On a proper interpretation of the collaboration agreement, it can be inferred that limited interest in the know-how was transferred and on reading of all the clauses together, there was no independent and outright sale of know-how. Reliance is made on the Special Bench judgment of the Bombay Tribunal in 1987) 22 ITD 87 (Bom) which lays down the proposition that even if the fee paid is for transfer of technology, the same will have the character of 'royalty'. It held that if the fee paid is of the nature of royalty the extent of legal or other protection available in relation to the subject-matter or contract will not help in coming to a different conclusion.'
25. Aggrieved by this, the assessed went in appeal before the Commissioner (Appeals). The Commissioner (Appeals) after hearing the submissions of the assessed and examining the provisions of the DTAA as well as the relevant provisions of Income Tax Act and also relying upon the decision of the Delhi Bench of the Tribunal in the case of M/s. DCM Ltd. (supra) came to the following conclusion :
'I have gone through the submissions of the learned representative for the appellant and also the order of the assessing officer. There is a lot of force in the submissions of the learned representative for the appellant. The definition of royalty under the said DTAA is narrower than the definition under the Act. Where such an agreement exists, it has to be given preference over the provisions of the Act. A comparative look at the two definitions shows that certain part of the definition which occurs in Explanationn 2 to section 9(1) does not figure under article VIIIA of DTAA. The know-how is an intellectual property and falls within clauses (i) and (ii) of the aforesaid Explanationn. The things for the transfer of which the assessed agreed to pay to M/s. ADC as such squarely fell within those two exclusionary clauses which do not form part of the definition of the term 'royalty' under article VIIIA. Again, article III of the said agreement brings to tax profits of an enterprise of a contracting state only when such an enterprise carries on business in that contracting state (India) through a permanent establishment in India, thereforee, the consideration for the transfer of technology by M/s. ADC to M/s. HCL did not constitute royalty as defined in art VIIIA of the DTAA. This is also supported by the decision of the Tribunal Delhi Bench in DCM Ltd. v. ITO at . The Calcutta and Bombay High Court decisions referred to by the assessing officer were under different circumstances wherein restricted definition under the DTAA agreement was not in question. Again, the payment involved in a lump sum payment for a definite technology and is not for a user or by way of a fee. The order of the Tribunal, Bombay Bench in Siemens v. ITO referred to by the assessing officer was with reference to the DTAA dated 13-9-1960 which did not contain article VIII-A defining royalties. Hence, the amount of Rs. 1,11,33,650 received by the appellant-company is by way of sale of technology which is possessed by M/s. ADC and is sold to M/s. HCL Ltd. for profits. In these circumstances, following the order of the Tribunal Delhi in M/s. DCM Ltd., I am of the opinion that there is no ground of bringing to tax the amount of Rs. 1,11,33,650.'
26. Aggrieved by this, the revenue is in appeal before us.
27. In the said facts and circumstances, the point at issue in the present appeal revolves on the finding of the nature of the transaction between M/s. ADC and M/s. HCL. The issue rests on the interpretation of the transaction vis-a-vis the agreement and the decision on the classification of this transaction as one of outright sale/transfer of technology or a case of user to technology is crucial to the issue.
28. In order to answer the said question, it would be relevant to consider article 6 of this agreement which deals with the aspect of consideration. It reads as under :
'6.1 In consideration of the rights granted and the technology, technical information to be conveyed and technical assistance to be provided hereunder (subject to the payment of additional consideration expressly set forth in article 3 hereof) HCL shall pay to Apollo.
(i) In respect of the Technology conveyed, Technical Information and Technical assistance to be provided under article 3.1 by way of lump sum in the net sum of US $ 1.1 million free of all Indian taxes.
(ii) In respect of the royalty payable for the Licensed Products manufactured by HCL in India, a fixed royalty of eight hundred US dollars (US $ 800) shall be paid on each unit of the licensed product manufactured by HCL in India and sold or leased.
(iii) In respect of licensing of Apollo Software Programs under article 9 thereof, the applicable license fees for each Apollo Software Program reproduced and sublicensed to India end users together with the licensed product, under the then current Apollo Software Program Price List under Ext. 4 of the Agreement which be as per Apollo, is prevailing distributor price list. It is agreed that the price for the operating system, AEGIS and DOMAIN/IX, will during the term of this agreement, not exceed seven hundred US dollars (US $ 700) as stated in Ext. 4.
(iv) In respect of the documentation under article hereof, the applicable license fees for each copy of the documentation reproduced under the List of Documentation under Ext. 6, will be five US Dollars (US $ 5) per copy.'
29. The Departmental Representative's argument has been that merely because in article 6.1 the term used is 'granted' and 'conveyed does not make it a case of outright sale and purchase or transfer as various other clauses have also been incorporated in the said agreement which have hedged this transfer and rendered it to be a case on mere transfer, transfer of 'user of technology' and not a case of outright transfer. For this, our attention has been invited to article 4 which is the confidentiality clause which reads as under :
'4.1 It is understood and agreed by the parties that the technology and any other information which Apollo consider proprietary to itself and its license and which will be conveyed and disclose by Apollo to HCL in carrying out the provisions of this agreement is and shall remain confidential during the terms of this agreement and after the expiration or termination hereof for any reason whatsoever, until such time as same shall enter the public domain or otherwise become generally known without a material breach of this agreement by HCL.
4.2. HCL agrees that they shall maintain the confidentiality of the technology and said other information conveyed and disclosed by Apollo hereunder and shall not without the prior written consent of Apollo disclose same or allow same to be disclosed to anyone, except to their management and employees and to any of HCL's sub-licensee(s) sub-contractor(s), agents or suppliers and then only to the extent required for the proper and authorised use of the technology hereunder, unless the technology and said other information;
(a) are contained at the time of disclosure by Apollo hereunder or thereafter in a patent or patent application or other printed publication made by a third party without a breach of this agreement by HCL; or
(b) are acquired by HCL from a third party lawfully in possession of same and not subject to any contractual or fiduciary obligation to Apollo to maintain the secrecy of same. HCL agree that, prior to any disclosure of the technology and said other information, they shall enter into confidentiality agreement, containing in substance the provisions of this article 4, with their management and employees and with any of the HCL is sub-licensee(s) sub-contractor(s), agents, or suppliers to whom such disclosure is to be made.'
30. In fact, various clauses in article 5 headed 'Industrial Property Rights, Warranties and Quality Control' were adverted to in support of the contention that the rights transfer were limited rights. Article 5.9 of it reads as under :
'5.9 HCL shall use its best efforts to maintain a standard of quality and workmanship in its manufacture of the licensed products equal to that of Apollo and shall manufacture the licensed products out of materials supplied by parties to be mutually agreed between HCL and Apollo. HCL shall permit representatives of Apollo, upon reasonable advance notice and during normal business hours, to inspect the manufacturing facilities of HCL used for the manufacture of the licensed products. In particular, Apollo's representative shall be permitted to inspect and monitor the quality control procedures to be used by HCL, as well as to inspect samples of the licensed products and the compliance by HCL, with the quality standards for the licensed products contained in the technology.'
31. Article headed 'Licensing Software Programs' the conditions therein specially article 8.4 pertaining to records was also adverted to by her. The same is being reproduced hereunder :
'8.4 HCL agrees to use its best efforts to ensure that each end user so sublicensed continues to comply with the terms of the sub-license. HCL shall maintain records specifically identifying each, Software, Program stocked by HCL and provided to end-users customers of HCL under this procedure, the quantities of such Software Program stocked and provided and the identity of the end-user customer to which they are provided; such records shall be made available to Apollo during regular business upon reasonable notice for purposes of enforcement of this agreement.'
Article 8.5 dealing with payment reads as under :
'8.5 Apollo may appoint independent third parties in India to audit HCL's records on software licenses granted to end-users in India 15 days after the end of each calendar quarter to determine exact number of sub-license granted to end-users.
Apollo shall charge HCL applicable license fees for sub-license and update sublicensed to India end-user customers under Apollo's Software Program Price List. HCL shall make payment for total applicable license fees due to Apollo immediately on receiving approval from the Reserve Bank of India for remittance of license fees payable. HCL shall remit payment by telegraphic transfer directly to Apollo's designated bank account in West Germany as specified by Apollo. Remittance to Apollo shall be in US dollars at the exchange rate prevailing at the date of remittance. It shall be the sole responsibility of HCL to obtain all necessary approvals to make payment to Apollo. Full payment of applicable license fees shall be made to Apollo by HCL not later than forty-five days after the end of the calendar quarter. Any delay in payment beyond the 45 days period shall entitle Apollo to charge HCL daily interest at the current prime interest rate fixed by the Bank of India.'
The General License Provisions in article 8.8 read as :
'All licenses granted herein shall be further subject to the following :
(a) Software Programs and Test Aids and any copies thereof shall in all cases remain the property of Apollo. HCL agrees to reproduce and include any Apollo copyright notice and other legends both in and on every copy of a Software Program or Test Aid in any form including partial copies and modifications of a Software Program or Test Aid. HCL may not use the Software Programs or Test Aids obtained hereunder except as provided for in this article;
(b) HCL agrees not to provide or otherwise make available any Software Program in any form to any person other than HCL's and Apollo employees, and end-user customers of HCL as provided for therein, without the express written consent of Apollo except, when any such person is on HCL's premises with HCL permission for purposes specifically related to HCL's permitted use of the Software Program or Test Aid. HCL agrees to take appropriate action by instruction, agreement or otherwise with HCL's employees, or other person permitted access hereunder to a Software Program or Test Aid to satisfy its obligations under, this agreement with respect to the use, copying, modification, protection and security of a Software Program or Test Aid. HCL will not make any copies of a Software Program or Test Aid without the express written consent of Apollo;
(c) HCL shall, at its own cost and expenses, protect and defend Apollo's ownership of the Software Programs and Test Aids against all claims, liens and legal program or Test Aid free and clear from all such claims, liens and processes;
(d) Apollo reserves the right to alter the designation of any software program in order to reflect, modifications of changes in policy or support requirements during the life of such software program.'
Article 8.9 dealing with Third Party Software Programs reads as under :
'Apollo does not authorise HCL to stock or sub-license software program belonging to independent Third Party Software Vendors as listed in the Apollo Software Program Price List or otherwise. HCL shall make its independent contractual arrangements with Third Party Software Vendors to sub-license their software program in India. Unless Apollo is expressly authorised by such Third Party Software Vendor to allow HCL to sub-license such Third Party software in India and to collect license fees in respect thereof, any such authority is expressly denied. Apollo will at the request of HCL, endeavor to introduce such Third Party Software Vendors to HCL for the purpose of concluding agreements for sub-licensing of Third Party Software in India.
Apollo will furnish a list of Third Party Software that HCL is authorised to sublicense and antecedent terms and conditions of such sub-licensing within 30 days of the effective date.'
Article 12 dealing with site facility planning schedule reads as under :
'12.1 HCL shall prepare the factory site designated for manufacture of the licensed protect in consultation with Apollo.
12.2 In order to assist HCL in preparing the production of licensed products Apollo may if requested provide assistance including supply of the following date and information. These data shall be in accordance with accepted international customary standard examples as follows:
(a) Plan for assembly line.
(b) Plan for manpower arrangement.
(c) Plan for equipment layout.
(d) Plan for infrastructure e.g. water supply, electricity, air-conditioning, transportation and communication.
(e) Plan for installation and operation of equipments for manufacture.
(f) Plan for production management.
(g) Plan for test and repair of licensed products.
HCL shall submit a production schedule to Apollo within 30 days after parties execute this agreement.
Article 14 dealing with duration and termination reads as :
'14.1 Unless earlier terminated, this agreement shall have an initial term of 5 years commencing on the effective date hereof. In the event that this agreement is not terminated earlier than said full initial term, then HCL may thereafter continue to manufacture, use and sell the licensed products under the rights granted herein without the obligation of paying any additional consideration to Apollo, including the right to manufacture, use and sell under any patents included in the technology covering the licensed products, provided that HCL shall make no claims against Apollo with respect to the licensed products.'
32. All in conclusive terms according to the arguments addressed by the learned Departmental Representative amount to hedging/ restricting the transfer and user of technology and not a case of outright sale/transfer of technology. Apart from relying upon the various clauses of this agreement, reliance has been placed upon the assessment order, the decision cited before us and the letter addressed by the Under Secretary of the Government of India Shri S.H. Keshwani to M/s HCL foreign collaboration with M/s. Apollo Computers Incorporation USA which is placed at paper book page No. 1 and 2 before us. A perusal of the same is also necessary to the issue, hence for ready reference it is also reproduced hereunder :
Registered Post
No. FC : 71(87)-Comp./SCS.
Government of India
Ministry of Industry
Department of Industrial Development
Secretariat for Industrial Approvals
Special cases section
New Delhi, the 20-11-1991
M/s HCL Ltd.,
608, Siddharth,
96, Nehru Place,
New Delhi-110 019.
Subject : Application from M/s. HCL Ltd., for foreign collaboration with M/s Apollo Computer Inc. USA for the manufacture of microprocessor based CAD/GAM work section.
Gentlemen,
With reference to the above application for the manufacture of abovementioned items, Government of India are prepared to approve the terms of collaboration with M/s Apollo Computer Inc. USA, subject to the following conditions in addition to those detailed in the Annexure to this letter.
'(i) Royalty : 3 per cent (subject to taxes) not exceeding US Dollars 800 per machine for a period of 5 years.
(ii) Lump sum know-how fee : US $ 11 lakhs (net of taxes) with tax liability to be borne by the Indian company.
(iii) Other payments of lump sum nature : US $ 1 lakh (net of taxes) with tax liability to be borne by the Indian company.
(iv) The company shall export 30 per cent of its production from the second year of production for a period of 5 years extendable for another period of 5 years at the discretion of the government.
(v) The collaboration arrangements shall cover the supply of source codes or system and application software.
(vi) The PMP shall be settled to the satisfaction of the government.........
Yours faithfully,
Sd/
(S.H. Keswani)
Under Secretary to the Government of India'
33. The authorised representative of the assessed, on the other hand, has apart from relying upon the impugned order and various decisions cited by him has also tried to make a case that this was a composite agreement and the use of the words granted and conveyed in article 6.1 clearly imply that the subject-matter of dispute was clearly a case of outright sale/transfer of technology and where the parties intended it to be otherwise, there as in clause 6(i)(ii) the amount is clearly defined as royalty and necessary taxes have been paid thereupon on the licensed products manufactured by HCL India. Our attention has also been invited to the title of this agreement which clearly uses the word technology transfer. Reference has also been made to article 2 of this agreement which reads as under :
'Subject to written approval of the appropriate government agencies and departments of the United States Export Licensing Authority and an conditions imposed on such approval and compliance therewith, Apollo hereby convey and grants to HCL exclusive right to manufacture, maintain, use and sell the licensed product in India in accordance with pursuant to and under the Technology. Said technology relating to the manufacture of the licensed products in India which is owned by Apollo as of the effective date of this agreement.
34. On the basis of which it was submitted that the intention of the contracting parties is clearly borne out that M/s. ADC intended to convey and grant to M/s. HCL the exclusive rights to maintain, use and sell the licensed products in India. Article 3 of this agreement which is titled transfer of Technology and Technical Assistance, article 3.1.1 reads as under :
'Apollo shall deliver the tangible technical information constituting the technology, in accordance with Ext. 3 be prepaid air mail or air freight C.I.F. or by such other means which are reasonable and obtain from HCL acknowledgement of such delivery to HCL's registered office in India or to such other location in India which HCL will designate. Apollo shall provide two copies of said technical information in a form capable of being copies in the English language. HCL may, at their own expense, translate same into the Indian language, subject to the confidentiality provisions of article 4 hereof. Apollo shall use all practical means to ensure that all the technical information under the technology provided to HCL is accurate, comprehensive and up to date and in the event that any of the technical information provided is inaccurate, comprehensive and up todate and in the event that any of the technical information provided is inaccurate, Apollo shall at its own cost rectify the inaccuracy without delay. Apollo will not be liable for any loss or damage suffered by HCL in respect of such inaccuracies.
Parties hereby recognise and agree that the tangible technical information referred to under Ext. 3 herein will be transferred, from time to time, without additions, lump sum payment to HCL over the duration of the agreement by the such reasonable means as and when such technical information is required or available, Notwithstanding the above and for the purpose of payment under the agreement under article 6 hereof, delivery of the technical information constituting of items (10) under Ext. 3 to HCL by whatever reasonable means and HCL's acknowledgement thereof shall be deemed to constitute sufficient delivery of technology under the agreement.'
35. Thus, according to him, the use of the term transfer by the contracting parties in the above mentioned clauses clearly makes out a case that the parties intended to transfer the technology and not merely the user of the technology. The argument has also been put forth by him that the said payment is a business profit for M/s ADC and since the fact is not disputed that M/s ADC do not have a permanent establishment in India as required by article 2 clause (1)(h) read with sub- clause (aa), (bb), (cc) and (dd) of the same. Thus, by virtue of article 3, clause 1 read with article 2 clause 1(h) M/s ADC do not have a permanent establishment in India and as such the profits arising would not be taxable in India.
36. On the basis of the argument thus addressed to us, we are of the opinion that although the fact that the lump sum payment made to M/s ADC is not taxable in India by virtue of article 3, clause 1 and article 2, clause 1 sub-clause (h), there is no dispute. This is so because in the circumstances that this payment is held to be profits of M/s ADC, then by virtue of these provisions they are not taxable as M/s ADC is not maintaining a permanent establishment in India. This statement does not advance the case of the assessed as article III, clause 7 of the DTAA stated as under :
'Where profits include items of income which are dealt with separately in other articles of this agreement, then the provisions of those articles shall not be affected by the provisions of this article.'
37. Thus clause 7 of article III of DTAA specially makes out a case that the items of income which are dealt with separately in other articles of this agreement then the provisions of those articles shall not be affected by the provisions of article III. In such a situation article VIII-A steps into the picture and comes into play. At this juncture, it is pertinent to reproduce the relevant provisions:
'Article, VIII-A
(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other state.
(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that state. But insofar as the fees for technical services are concerned, the tax so charged shall not exceed 20 per cent of the gross amount of such fees.
(3) The term 'royalties' as used in this article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.
(4) The term 'fees for technical services' as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments, in consideration for, services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.
(5) The provisions, of paras (1) and (2) of this article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties of fees for technical services arise through a permanent establishment situated therein, and the right, property or contract in respect of which the royalties or fees or technical services are paid is effectively connected with such permanent establishment. In such case, the provisions of article III shall apply.
(6) Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that state itself, a land, a political subdivision, a local authority or a resident of that state. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the obligation to make the payments was incurred and the payments are borne by that permanent establishment, then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment is situated.
(7) Where, owing to a special relationship between the payer and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this agreement.'
38. We have given our utmost consideration to the agreement entered into between M/s. ADC and M/s. HCL and it is our considered opinion that clear interpretation of the various clauses placing restrictions, limitations, controls, checks, overall control clearly makes out a case that this is not a case of transfer of technology and is merely the case of transfer of user of technology. Perusal of the various judgments relied upon before us further fortifies this view.
39. The first and the foremost case which needs to be discussed is the decision of the Bombay High Court in Aziende C.N.A. Italy (supra) which lays down the principle that the agreement has to be construed as a whole and that the different clauses in the agreement cannot be considered separately. After examining the facts of the case, their Lordships of the Bombay High Court came to the conclusion :
'The recitals in the agreement as also the provisions contained in clause (6) thereof showed that the obligation undertaken by the assessed did not end merely with the handing over of the secret processes, but also extended to helping the Indian company in exploiting these processes property, efficiently and economically. The handing over of the know-how or secret processes was intimately connected and concerned with the obligation which was undertaken by the assessed in clause (6). thereforee, it was properly held that part of the technical fees, accrued in India.'
40. In the course of the argument, the authorised representative of the assessed submitted that it was not disputed by him that the agreement has to be construed as a whole and as such the principle was not opposed thereto. The learned Departmental Representative on the other hand, has submitted referring to the various clauses and recitals hedging in this agreement clearly makes out a case that it is a case of transfer of technology. We are inclined to agree with her submissions as we have already indicated earlier in the order. After examining the facts of the case in detail it is seen that decision of the Bombay High Court fully supports the case of the revenue.
41. Apart from the above mentioned case, the assessing officer also places reliance on the decision of the Calcutta High Court in the case of N.V. Philips Reported (supra). It is seen that in the course of the arguments before the Tribunal, the learned authorised representative has sought to make out a case that the said decision is not applicable as the decision was rendered on the definition of royalty in Explanationn 2 to clause VI of sub-section (1) of section 9 and there was overriding DTAA entered into by the two countries, thereforee a contract entered into by the Indian company and the non-resident company incorporated in Netherlands, governed by DTAA. After having gone through the said case, it is seen that despite the fact that the issue of overriding title of the DTAA was not an issue there but the decision lays down certain principles for interpretation which would render help in determining whether a case is of transfer of technology or of transfer of user of technology. As far as the issue of the DTAA overriding the provisions of section 9 of the Act are concerned, there is no dispute over these. The fact that by virtue of DTAA between India and the Federal Republic of West Germany is concerned it is observed that article VIII(A) was added vide protocol signed on 28-6-1984 and ratified on 10-7-1985. The situation where user of technology is concerned, it is clearly envisaged in the definition of royalty. As such, the user of technology is clearly within the purview of royalty and thus, clearly taxable in India by virtue of article VIII-A, clause 3 read with article III clause 7 of DTAA. Accordingly, despite the fact that in this case, the interpretation of DTAA vis-a-vis the Income Tax Act was not an issue but the issue of transfer of technology or user of technology was within the ambit and as such it also supports the case of the revenue.
42. The Commissioner (Appeals), on the other hand, places reliance on the decision of the Delhi Bench of the Tribunal in the case of DCM Ltd. v. ITO (supra) on which the learned authorised representative places strong reliance. The learned authorised representative has submitted that this case is fully applicable to the issue at hand because it involves the interpretation of the DTAA between India and U.K. Learned Departmental Representative, on the other hand, has argued that the facts are fully distinguishable. A perusal of this decision shows that there was no prohibition, control or monitoring of the nature as brought out in the perusal of the transfer agreement in the present case before us and the conclusion has been arrived at on the interpretation of the transfer agreement therein where the nature of the payment has been held to be constituting business profit for the foreign concerns for which in order to be eligible to tax in India under the DTAA, it is necessary to have a permanent establishment. The enunciation of this principle is not in dispute before us and does not advance the case of the assessed.
43. Learned Departmental Representative also placed reliance on ITO v. Automobile Peugeot (supra) wherein the foreign company entered into an agreement with an Indian company for supply of technology data for manufacture of diesel engine. The Tribunal after examining the facts of the case came to the conclusion that only the right to use technology was granted to the Indian company as there were other restrictive covenants in the agreement and thus, the payment made to the assessed-company by the Indian company under the said agreement was for user of technology and there was no transfer of technology under the agreement and this payment was in the nature of royalty. The learned authorised representative, on the other hand, has argued that the, legal proposition laid down therein was not disputed by him. In defense it was submitted that each case proceeds on its own peculiar facts and since M/s. ADC do not have a permanent establishment in India, the case does not apply. After examining the facts of this case it is seen that several restrictions were placed upon the Indian company under the agreement which were spelt out in the contract. It is observed that there was to be a continuous dialogue between the parties in the matter of supply of updated technology for the manufacture of engine. As such, it was decided that the case was not of off the shelf transfer and hence was 'a transfer of user of technology. It is also noticed that this case was governed by a DTAA between India and France. As such, it fully advances the case of the revenue and our view is fortified by this decision. An examination of the restrictive covenants, prohibitions and controls clearly make out a case of transfer of user of technology, hence exigible to tax in India under article VIII-A of the DTAA.
44. Learned Departmental Representative has also placed reliance on LAC v. Daimler Benz AG, West Germany (supra). It is seen that the proposition laid down therein fully supports the view taken by us. Similarly, Atlas Copco AB of Sweden v. Dy. CIT (supra) relied upon by the Departmental Representative further fortifies this view. It is seen that the assessed therein a non-resident company entered into an agreement with an Indian company for supply of technical know-how for manufacture of air compressors and rendering technical assistance for the said manufacture against a lump sum consideration. The assessed in its return did not include the receipt of the first two Installments of the consideration amount on the ground that it was a case of outright transfer of the know-how by virtue of which it could not be termed as royalty and thus, was not taxable in India as per article III of the DTAA since the assessed did not have any permanent establishment in India. It was also contended by the assessed there that the disputed amount was a capital receipt and not liable to tax since the amount was a consideration against the outright transfer of know-how. The Tribunal after considering the terms of the DTAA as a whole and the transfer agreement came to the conclusion that there was no outright transfer of know-how by the assessed-company to the India company. Since the assessed-company could impart the technical know-how to any other party in the world whereas the Indian company, on the other hand, had to maintain secrecy of know-how which could be disclosed to the other parties by the Indian company only with the prior written consent of the assessed. The license also had been granted to use the technical know-how for a period of five years though it may be extended for a further period. Similarly, other conditions pertaining to trade market etc., showed that the assessed had not sold all his rights of the know-how to the Indian company and on the contrary it had kept all such rights with it and had merely allowed the Indian company the use of the know-how only as a licensee. thereforee, the Indian company had only acquired rights to use the know-how on payment of lump sum consideration and not an exclusive right in the property of the know-how. Hence, the amount receivable under the agreement could not be held to be a capital receipt.
45. Examining the facts of this case, it is seen that the 'transfer of technology' claimed by the assessed in the present case is only a case of transfer of user of technology and the Indian company has not acquired the know-how but only the rights to use the know-how. By virtue of this as we have observed earlier the case of the assessed-company is fully covered by article VIII-A of the DTAA and exigible to tax in India. This lump sum payment cannot be said to be business profit in the hands of the foreign company and thus, the requirement of having a permanent establishment in India for it to be taxable in India is not necessary.
46. Similarly, the learned Departmental Representative places reliance of Dy. CIT v. Majestic Auto Ltd. (supra) in support of the contention that non-designation of the payment as relied would not alter the true character of the payment. It is seen that this decision also supports the case of the revenue.
47. Reliance has also been placed on the decision of the Gujarat High Court in the case of CIT v. Ahmedabad Manufacturing the Calico Printing Co. (supra) wherein their Lordships of the Gujarat High Court held that on the facts of the case before them that agreement between assessed and foreign company for 10 years only was for supply of technical know-how to assessed. The assessed therein gave the exclusive license to manufacture, sale and exploit products and improvement thereof in India. The payment made to foreign company was royalty for exclusive right to manufacture products. A perusal of the decision shows that firstly this was the case where the overriding effect of DTAA was not an issue. It is also seen that the decision was against the stand taken by the revenue there as the revenue there had tried to make out a case before the Gujarat High Court that the disputed payment was 'research contribution' and as such covered by residuary clause 2(v) under Part II of the First Schedule to the Finance (No. 2) Act, 1971. The Tribunal held that having regard to clause 17 of the agreement between the companies the payments were royalty payments and as such were liable to deduction at source at the lower rate of 50 per cent. This finding of the Tribunal was upheld by their Lordships of the Gujarat High Court in the following terms :
'Held, that, firstly, the agreement between the assessed and the foreign company was for a period of ten years only. Secondly, it was in respect of certain secret or patent formulations owned or controlled by the foreign company. The payment, though called 'Research contribution' in the agreement, was nothing but the consideration correlated to the extent of the exploitation of the secret formulations and patent rights and various other rights belonging to the foreign company by the assessed in India and that it was for the exclusive right to manufacture the products that the payment was made and it was nothing else but 'royalty' as known to law and to the international commercial world in the context of such agreements. thereforee, the Tribunal was right in holding that the payment of Rs. 48,698 made by the assessed to the foreign company during the relevant period was royalty payment and was liable to deduction of tax at other lower rate of 50 per cent as prescribed in the Finance (No. 2) Act, 1971.'
48. A perusal of this judgment shows that the limitation period of 10 years was crucial in arriving at the conclusion that the payment was of the nature of royalty. In the facts as they stand before us, the limitation period is five years which advances the case of revenue that the transfer is of user of technology and not a case of outright sale of technology.
49. The learned authorised representative, on the other hand, has placed reliance on the decision of the Delhi Bench of the Tribunal in the case of DCM (supra) which has also been considered by us and after examination found that the said decision is not applicable as the facts are entirely distinguishable. There were not indications that the said transfer agreement was hedged in by the kind of restrictive conditions which are there in the case of the assessed at hand. Similarly, in the present case, the transfer of technology is limited for a period of 5 years though extendable which was also not a point at issue in the case of DCM (supra).
50. A part from the above mentioned case relied upon by the learned authorised representative the other decision relied upon by him is the decision of the Karnataka High Court in the case of Citizen Watch Co. Ltd. v. Inspecting Assistant Commissioner (supra). A perusal of this decision shows that apart from the fact that the facts are distinguishable, it is also seen that it does not advance the case of the assessed. The facts as existed before their Lordships of Karnataka High Court therein were that there was an agreement for the supply of technical know-how for the manufacture of watches between the Government Company in India and a Japanese company. The amounts were payable by the Indian company to the Japanese company as documentation fee, technical assistance fee. The royalty under the DTAA between India and Japan fees for technical services were to be treated as income from sources within the Contracting State in which the services were rendered. Their lordships of the Karnataka High Court held that the agreement between the Government Company and the assessed showed that the documentation fee, technical assistance fee and royalty could not be treated as being of the same character. The documentation fee and technical assistance fee were separate fees and were not royalty or a similar payment dealt within the article x(e) of the DTAA between Japan and India. Thus, it cannot be said that this decision advances the case of the assessed before us.
51. The learned authorised representative has also placed reliance on Davy Ashmore India Ltd. (supra). It was argued by the learned authorised representative that this was the case which involved the DTAA between India and U.K. and the consideration for transfer of designs and drawings was held to be not a case of royalty and hence not assessable to tax. The amount paid for import of drawings and designs, therein was with the approval of the Reserve Bank. It was also submitted that their Lordships of the Calcutta High Court therein had an occasion to consider there earlier decision in the case of N.V. Phillips v. ITO (supra). It may be relevant to point out that learned Departmental Representative has placed reliance on this earlier decision of the Calcutta High Court and the assessing officer has also relied upon the same.
52. After examining the said decision it is seen that it does not advance the case of the assessed. Their Lordships of the Calcutta High Court therein held that where the DTAA provides for a particular mode of computation of income, the same should be followed irrespective of the provision of the Income Tax Act. This principle also does not advance the case of the assessed. In fact, the assessed himself is relying upon this principle the only difference being that the proposition renders no help to the issue at hand. Anyway point at issue is not the applicability or the overriding effect of the DTAA vis-a-vis the Income Tax Act. The point at issue is the interpretation of the transfer agreement, with relevance to the finding whether it is a transfer of technology or merely a transfer of user of technology. Their Lordships of the Calcutta High Court in Davy Ashmore India Ltd. (supra) in fact lay down the principle which advances the case of the revenue, it is held by them as under :
'The term 'royalty' has been defined in the agreement to mean, inter alia, the payment of any kind including rentals received as a consideration for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process. It is important that, in order that a payment may be treated as royalty for the purposes of article XIII of the Agreement for Avoidance of Double Taxation between India and the U.K. the persons who is the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permit 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 m the designs, secret formula, etc., and allows the use of such fight, the consideration received for such user is in the nature of royalty. Where, however, there is, an outright sale or purchase, the consideration is for the transfer of such designs, secret formula, etc., and cannot be treated as royalty.'
(Emphasis here italicised is print, supplied)
Although after examining the facts of that case their Lordships held as under :
'Held, that the non-resident did no retain the property in the designs and drawings. The designs and drawings were imported under the import policy with the approval of the RBI on the basis of the letter of intent. The import of the designs and drawings postulated an out all out transfer or sale of such designs and drawings. The consideration paid for the transfer was not assessable as royalty.'
53. Their Lordships although did consider the earlier decision in the case of N.V. Phillips (supra) but have categorically held thereafter that :
'Having regard to the facts and circumstances of this case is must be held that the present case is not a case where a non-resident is retaining the property in the drawings and designs .........'
54. Thus, it is seen that M.V. Phillips on the facts of its case very much holds sway and the subsequent decision by the same High Court in fact lays down the same principle and fortifies our view. Accordingly, the case of the assessed does not get any assistance from it. The learned authorised representative also placed reliance on the Graphite Bicarb India Ltd. v. ITO (supra). The study of this decision shows that the facts therein are entirely distinguishable and render no help to the assessed. In this case, the parties to the collaboration agreement had clearly bifurcated the consideration by stating that the lump sum consideration for transfer of technical know-how abroad will be an outright sale and will not independent of the royalty at 3 per cent payable for the right to use that know-how. It is seen that this bifurcation has the approval of the Government of India. Thus, a second Installment paid in clause 11 of the collaboration agreement was held to be commercial profit within the meaning of article III of the agreement for avoidance of double taxation between India and France and since the foreign company had no permanent establishment in India, it was not liable to be taxed in India. Thus, in the facts of that case, the bifurcation between the transfer of technical know-how and the transfer of the right to use that know-how had categorically been approved by the Government of India which is not emerging from the facts of the case before us. In fact, a perusal of the sanction obtained from the Government of India clearly uses the word 'fee' which in the absence of any other evidence clearly can be held to be a case of fees for user of technology which is the only conclusion possible in the face of number of restrictions, control, etc., hedged in the transfer agreement. The proposition laid down by the Special Bench of the Tribunal therein that the commercial profit within the meaning of article III of the DTAA is not assessable to tax since the foreign, company has no establishment in India also does not advance the case of the assessed as the amount is not held to be commercial profit but as 'royalty' as per article III-A of the DTAA.
55. The authorised representative of the assessed has also placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Swadeshi Polytex v. ITO (supra). It was argued by him that the assessed's case is fully supported by this decision. The learned Departmental Representative, on the other hand, in her reply contended that the facts are not identical as in the present case before us. There is no dispute over the fact that there is a limitation of 5 years over the use of technology and in fact after 5 years unless extended the Indian company cannot even use this technology whereas this was not a fact in Swadeshi Polytex Ltd.
56. After having gone through the above mentioned decisions, it is seen that material facts are distinguishable, it is seen that after examining the issue at length the Tribunal came to the conclusion therein that the payment made by the assessed therein to the foreign company did not fall within the definition of term royalty under the DTAA between India and Federal Republic of Germany. The foreign company therein had transferred the technical know-how to the assessed in consideration of the amount in question and such a transfer was held to not merely a right to its use and as such since the foreign company did not have a permanent establishment in India, the same was not assessable to tax even as a business receipt. It is seen that in the arguments addressed by the learned Departmental Representative therein at page 332 reliance has been placed upon the Special Bench decision of the Tribunal in Siemens Aktiengellschaft & Anr. unreported decision of the Delhi Bench of the Tribunal and the DTAA. A perusal of this decision shows that although there was a secrecy clause in the transfer agreement, but there were no restrictions, conditions, controls etc., as has been placed in the recitals of the transfer agreement in the present case. Accordingly, there being material difference in the relevant facts of both these cases, the said decision of the Tribunal does not render any help to the case of the assessed, and as such is not relevant to the issue at hand.
57. The learned authorised representative has also placed reliance on Modern Threads Ltd. v. Dy. CIT (supra). It was submitted by him that this case discusses the entire gamut of law and lends support to the case of the assessed. A perusal of this order of the Tribunal shows that the learned JM held at page 125 of his order that the facts were identical to the facts of the case in DCM (supra) decision of the Delhi Bench of the Tribunal. The learned JM therein also came to the conclusion that the provisions of DTAA will prevail over the provisions of the Income Tax Act and after examining the issue he came to the conclusion that the nature of the payment was of business profit and not taxable as the foreign company did not have a permanent establishment in India. He also relied upon the Vienna Convention in order to decide the case in favor of the assessed at page 126, para 14 of his order :
'14. In our view the principles of Vienna Conversion is guidelines for the countries who are party to this convention. It is also empathic to explain that when an agreement is entered between two countries that should be fulfilled by following its terms and conditions. In our considered view Indian and Italian Governments entered into 'an agreement for avoiding the double taxation in both the countries. thereforee, provisions of section 90 are also overriding on provisions to section 9(1)(vi).'
58. Since there was a difference of opinion over the nature of this payment, the matter was referred to the TM who concurred with the finding of the learned JM. It is also seen that in that case, there was no controversy over the approval sought by the Government of India for the said agreement whereas in the case before us, learned Departmental Representative has strongly contended that the approval of the Government of India has been sought on the understanding that the payment is of the nature of 'fee' and it cannot be presumed to be a case of business profit. Although the learned authorised representative has argued that the terminology of fee will not be the deciding criteria as the intention of party is important but after having examined the entire transfer agreement at length we are of the opinion that the nature of the said payment is clearly a case of royalty, and thus exigible to tax under section article VIII-A of the DTAA. In the earlier part of this order, we have discussed and analysed the transfer agreement and after going through the recitals which make out a strong case of prohibition, controls etc., we are of the opinion that by no stretch of imagination the transfer can be held to be a case of transfer of technology and it in fact is case of transfer of user of technology. Thus, this decision also does not advance the arguments of the assessed.
59. Both the assessed and the revenue came in cross-appeal before the Tribunal who after examining the issue at length held that the receipts of the assessed fell in the definition of royalty and that being so they were exempt under article III of the DTAA and thereforee taxable in India. Accordingly, the appeal of the revenue was allowed and the COs filed by the assessed were rejected.
60. Thus, a perusal of the plethora of judgments for and against the issue and the impugned order before us, it is seen that the learned Commissioner has derived support strongly from the principle/ proposition that the DTAA entered into by the Government of India and the Federal Republic of Germany by virtue of section 90 of the Income Tax Act shall have the overriding effect over Explanationn 2 section 9(1)(vi) of the Income Tax Act. This principle is not in dispute and needless to say, has been accepted both by the assessed as well as the revenue. It may be pertinent to state here that this principle has the sanction of various courts. It is more pertinent to state thereafter that this principle neither advances the case of the revenue nor the assessed.
61. The next issue which needs to be appreciated is that the learned Commissioner (Appeals) has also drawn strength from the fact that in order to tax business profits of a foreign non-resident assessed, it is necessary to have a permanent establishment in India by virtue of the DTAA and the fact that the assessed does not have a permanent establishment in India clearly makes out a case that business profits of the said assessed in the said circumstances are not exigible to tax. This principle is also not in dispute before us and also it may be reiterated does not advance the case either of the assessed or the revenue before us. The whole controversy revolves around the issue of the nature of the payment. The assessed has tried to make out a case that the said payment is of the nature of business profit and the revenue has contended, on the other hand, that the nature of the payment clearly brings the amount under the definition of royalty under the DTAA. The various judgments relied upon for and against these propositions have been analysed in detail and in our considered opinion make out a case in favor of the revenue. The DTAA specifically provides for a situation where the payment has been made for a use of technology, then the payment is exigible to tax in India under article VIII-A and none of the judgments or orders relied upon before us advance the case of the assessed.
62. Before parting we would like to state that merely relying upon the decision in favor of the assessed or revenue laying down certain principles and propositions of law with reference to the facts of the said case does not by itself advance the case of earlier side. It is necessary to understand the principle of law enunciated on the facts of the case and then to apply those principles to the facts of the case to which it is, sought to be made applicable. Merely relying upon decisions does not lend support to the issue. Accordingly, for the reasons discussed at length and the facts and decisions of the case and position of law, the ground raised by the revenue is allowed. The impugned order is set aside and the assessment order is restored.
63. In the result, the appeal filed by the revenue is allowed.