Atlas Copco A.B. of Sweden Vs. Inspecting Assistant

Decided On : Nov-23-1990

Court : Income Tax Appellate Tribunal ITAT Mumbai

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			'judgement' => ' 1. The appeal is directed against the order of the CIT under the provisions of Section 263 of the Act.</p><p align="justify">2. Assessee is a non-resident Swedish company and had entered into an agreement with M/s. Atlas Copco (India) Ltd., for the supply of know-how for the manufacture of Screw type compressors and also to render technical assistance that might be required in the said manufacture. For this, assessee was to receive a lump sum consideration of US $75,000 in three equal instalments of US $25,000 each. Out of the said amount of US $ 75,000, two instalments of US$ 25,000 were received by the assessee during the previous year relevant to the assessment year 1983-84. The assessment for this year 1982-83 was completed on a total income of Rs. 11,56,800 being dividend income received by the assessee from the Indian company, viz., Atlas Copco (India) Ltd. The Assessing Officer accepted the contention of the assessee that the first two instalments as per the agreement dated 4-2-1981, due during the previous year relevant to the assessment year, were in fact received in the subsequent year and those would be taken into account on receipt basis in subsequent years.</p><p align="justify">3. The CIT had an occasion to peruse the income-tax records of the assessee. He came to the conclusion that these amounts were taxable on the accrual basis and in so far as the amounts were excluded by the Assessing Officer from the total income of the year under appeal he considered the order passed as erroneous being prejudicial to the interest of the revenue. He, accordingly, issued a show-cause notice to the assessee. He rejected the contention of the assessee that the amounts received were for technical services, as according to him, it was manifest that the lump sum amount was not payable to the assessee for rendering any technical services. He further held that the lump sum consideration receivable by the assessee would clearly constitute royalty as defined in Article VII of DTA agreement between India and Sweden and such royalty would be taxable on accrual basis. He set aside the order of the Assessing Officer and directed him to re-do the assessment after including the said amount on the basis that it had accrued or arisen or deemed to have accrued or arisen. He further observed that in that view, it was not permissible to include the aforesaid instalments in computing the total income of the assessee company for the assessment year 1983-84. It may be mentioned in this connection that the Assessing Officer had completed the assessment for the subsequent year, viz., 1983-84, including these amounts in the total income. Assessee is aggrieved. It may be stated that the order for 1983-84 was the subject matter of an appeal before the CIT(A). It was argued before the CIT(A) that the amount received by the assessee from the Indian company for disclosure and supply of know-how outside India constituted industrial or commercial profits within the meaning of that expression in Article III of DTA agreement between India and Sweden and since assessee had no permanent establishment in India, the same would not be exigible to tax. The CIT(A), however, held that the amount was in the nature of taxable royalty. He further observed that the said amount was also taxable on 40%. Subsequently, on an application moved by the assessee, the CIT(A) modified his order and directed the ITO that since the transfer of technical know-how was outside India, consideration for the same would be exigible to tax only at 20%. He also accepted the submissions of the assessee that since this amount was found to be taxable by the Assessing Officer in the assessment year 1982-83, the same could not be taxed in the year 1983-84. This order has become final; in the sense that neither the department nor assessee had filed any appeal before the Tribunal.</p><p align="justify">4. It is now contended by the learned counsel for the assessee that the order passed by the CIT under Section 263 is nonest in the eye of the law. The order for the assessment year 1983-84 was passed by the Assessing Officer on 16-10-1985 including the two instalments due as per the agreement with the Indian company in the total income of the assessee. The revisional order under Section 263 was passed on 10-6-1986. It is, therefore, difficult to conceive how the order passed by the Assessing Officer was erroneous being prejudicial to the revenue. The income had already suffered tax in the assessment year 1983-84. Even if there was an error in the order passed by the Assessing Officer in the assessment year 1982-83, in view of the fact that the amount had suffered tax in the year 1983-84 on a receipt basis, it would not be correct to hold that the order passed by the Assessing Officer has caused prejudiced to the revenue. Assumption of jurisdiction by the CIT under Section 263 is, therefore, not justified.</p><p align="justify">Assessee further invites our attention to the fact that while completing the assessment for the assessment year 1982-83 as per the directions of the CIT under Section 263, the Assessing Officer has initiated penalty under Section 271(1)(c) and, if prejudiced is caused.</p><p align="justify">it was to the assessee and not to the department. It is then pointed out that the Assessing Officer's order cannot also be regarded as erroneous for yet another reason. Assessee has been maintaining a method of accounting under which receipts of this nature are accounted for on cash basis. The amount, if taxable at all, could be in the assessment year 1983-84 and the Assessing Officer has rightly included the amount in the assessment of that year. The decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119ITR 573 to the effect that the royalty income receivable by non-resident is taxable on accrual basis, could be distinguished and as a matter of fact, Unas been, in the decision in I AC v. Reinz Dichtungs GmbH [1989] 31 ITD 67 (Delhi) (SB). In that case the Tribunal was held that where the assessee has regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was accepted by the revenue for earlier years and approved by the Tribunal too, the revenue was not justified in converting it into mercantile system unilaterally.</p><p align="justify">In the light of this decision also it would appear that the order passed by the Assessing Officer for the assessment year 1982-83 or 1983-84 did not suffer from any apparent or glaring mistake to justify the action under Section 263 by the CIT. Adverting to the more basic issue, viz., whether the income was chargeable to tax at all in India in the light of the DTA agreement between Sweden and India, it is contended that what is taxable in India by way of royalty is royalty for the right to use copyright, artistic or scientific works, patents, models, designs, plans, secret process or trade mark etc., and this would be evident from Article 7 of the DTA agreement. Thus, where the payment is for transfer of designs and technical know-how outside India and not for the user in India there would be no justification for including such payments received by the non-resident in the total income. In this case, it is contended, there was no stipulation in the agreement that the designs and drawings and other technical data furnished by the assessee was to be returned to the assessee after the stipulated period or after the agreement had come to an end. As a matter of fact, the decision of the CIT(A) to bring to tax the royalty received by assessee at 20%, would clearly go to show that the payment is not for the user but for a transfer as under Section 115 A of the Act. Tax at 20% is leviable only for transfer outside India of any data documentation etc. The assessee fairly concedes that payment by the Indian company under the agreement would be in the nature of industrial and commercial profits. But since the assessee had no permanent establishment in India, the same would not be exigible. By virtue of the definition of royalty as contained in Article VII of the DTA agreement, the amount received by the assessee cannot be regarded as royalty. The reliance on secrecy clause, as contained in Article 9 of the agreement between the assessee and the Indian company, is not going to, advance the case of the department. The clause relating to the non-disclosure of technical know-how or technical information, has been included to safeguard the worldwide interest of assessee and such clause could be seen in any technical know-how agreement. It cannot be used as an aid in interpreting the nature of payment receivable by the non-resident, who had agreed to impart with the technical know-how or technical knowledge.</p><p align="justify">5. The learned Departmental Representative, on the other hand, contends that the order of the CIT does not contain any specific directions. It is only to the effect that if the amounts are taxable, the proper year should be the year 1982-83 and not 1983-84 as has been held by the Assessing Officer. It is then pointed out that the order for 1983-84 where the amount was first brought to tax assessee had not taken any plea to this effect. At any rate, that part of the order of the CIT(A) for that year under which the amount is taxable as royalty has not been challenged by the assessee. The Departmental Representative further invites our attention to the decision of the Tribunal in the case of Atlas Copco MCT AB of Sweden [IT Appeal Nos. 4999 to 5001(Bom.)of 983).</p><p align="justify">where in similiar circumstances, the "Tribunal has taken the view that royalty due to the assessee was taxable in India.</p><p align="justify">6. The learned counsel for assessee in reply contends that the order for the assessment year 1983-84 by the CIT(A) was not challenged because no part of royalty income was included in the total income.</p><p align="justify">Assessee, in such circumstances, could not be said to be aggrieved and an appeal probably would not lie. As regards the Departmental Representative's reliance on the Tribunal's order in Atlas Copco MCT AB of Sweden's case (supra) it is contended that though that decision has gone against the assessee, it would be of no help in deciding the fresh issue that has been raised in this appeal. In that case the Tribunal probably took the view adverse to the assessee by applying the source rule. The Tribunal took the view that the source of the non-resident assessee's income was situated in India and, therefore, the income by way of royalty was chargeable to tax in India. Assessee's argument, that it was the agreement that was the source of income, was rejected by the Tribunal. In this case the definition of royalty as contained in Article VII of DTA agreement is quite clear and the amount received or due to a non-resident, could be taxed by way of royalty, if the same is for user of technical know-how imparted under an agreement and not for a transfer. In this connection, assessee relies on the decisions of the Bombay High Court reported in CIT v. Emco. Electro (P.) Ltd. [1979] 118 ITR 864 (Bom.) and CIT v. Asian Electronics Ltd. [1989] 177 ITR 60(Bom.) where the court has held that depreciation and development rebate are admissible on payments made for acquisition of technical know-how. It is then submitted that depreciation is admissible to the owner of an asset and, therefore, if the ratio of these two decisions are applied it would be clear that the assessee who has paid for the acquisition of technical know-how, is the owner of the assets. Replying to a pointed question from the Bench, assessee submits that the amount received by assessee could be in the nature of revenue income and the paying party could claim it as revenue expenditure; but that by itself is not going to detract from the merits of assessee's case. The amounts received by assessee are in the nature of business income or industrial or commercial profits but tax could not be levied for the reason, as stated earlier, assessee has no permanent establishment. But that would not automatically convert the receipts into royalties as royalties could only mean payment received for user of certain rights spelt out in Article VII of the DTA agreement. Assessee also contends that there is absolutely no merit in the arguments of the Departmental Representative that the order of the CIT did not contain any specific directions and this would be very clear if one goes through para 7 of the CIT's order. In the said para, the CIT has clearly held that the two instalments aggregating to US $ 50,000 which accrued to the assessee company during the previous year relevant to the assessment year 1982-83 were chargeable to tax in India as income by way of royalty in terms of Article VII of the DTA agreement. It was, therefore, incumbent on the Assessing Officer to assess such income for the assessment year 1982-83. The CIT has left nothing to guess. It is then submitted that both on the preliminary ground, viz., for want of jurisdiction and also on merits, the order passed by the CIT is liable to be cancelled.</p><p align="justify">7. We have heard the parties to the dispute and in our view the order passed by the CIT has to be upheld. The Madras High Court in Standard Triumph Motor Co. Ltd.'s case (supra) has clearly held that royalty income due to a non-resident has to be taxed on accrual basis. Reliance by assessee, in this connection, on the Tribunal' s decision in Standard Triumph Motor Co. Ltd.' s case (supra) is misplaced. That was a case where assessee had regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was also accepted by the revenue and the Tribunal in the earlier years. It was in that context the Tribunal held that the system of accounting which had been followed regularly by an assessee and accepted by the department could not be unilaterally changed by the revenue. In this case no material has been produced before us that the method of accounting followed by assessee is the cash basis. Assessee tried to explain this position by stating that assessee's only source of income is royalty and dividend income and the maintenance of books of accounts in India in the circumstances indicating the method of accounting cannot be insisted upon. Thus, it would be clear that in the premises, stated by the assessee regarding the maintenance of books of accounts, the facts in Standard Triumph Motor Co. Ltd.'s (supra) are not on all fours with the facts as in this case and that decision, therefore, would be inapplicable. Coming to the other argument, that there was no prejudice to the revenue, inasmuch as when the CIT took action under Section 263 the amount was already included and taxed in the total income for the assessment year 1982-83, is also to be rejected. The prejudice contemplated under Section 263 has to be construed as prejudice to the tax administration. It has to be remembered in this connection that the provisions of Section 263 are not revenue raising measures. They are intended to set right the mistakes committed by the Assessing Officer which has caused prejudice to the revenue. The prejudice has, therefore, not to be measured in terms of rupees and paise. In this case the Assessing Officer had proceeded to tax the amount on a receipt basis though there was a decision of the High Court to the effect that in the case of a non-resident royalty income has to be taxed on accrual basis. By accepting the receipts as the proper basis for taxation, a prejudice has been caused to the revenue and if the CIT had taken rectificatory action, the same cannot be construed as without jurisdiction. It may not be out of place to mention that the prejudice contemplated under Section 263 has not necessarily to be an immediate prejudice. We, therefore, uphold the action of the CIT in initiating and passing an order under Section 263 of the Act.</p><p align="justify">That takes us to the more substantial issue whether the income could be taxed in India as royalty. The assessee was fair enough to concede that on the basis of source rule, the Tribunal has decided the issue in Atlas Copco MCTAB of Sweden's case (supra) and also in the case of First ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Bom.) against the assessee and in favour of the revenue. We, therefore, following these decisions shall hold that the source of this income is in India. The next question that comes for consideration is whether the amount received by assessee was in the nature of royalty. In this eloquent arguments, the learned counsel for assessee, tries to demolish the case of the revenue by pointing out that what could be regarded as royalty is the consideration received for user and that where transfer outright is involved the same could not be regarded as royalty. In the first flush, the contention raised on behalf of assessee appears to be attractive but the use of the word "transfer" in Section U5A(b)(ii), to which a reference has been made and on which assessee has set a lot of store by, would not be helpful at all. The word "transfer" in that section would appear only to indicate the place where the technical know-how including, designs, drawings etc., were made available to assessee for the purpose of determining the rate of tax. It cannot be construed as making a distinction between the transfer outright or a transfer only for the purpose of user of scientific data, copyright etc. In the present day condition of rapid scientific developments, a distinction between the transfer of technology and its user is a futile exercise. We shall in this connection refer to the decision of the Bombay High Court in CIT v. American Consulting Corporation [1980] 123ITR513 (Ori.). In that case the court has held that acquiring of technical know-how and technical advice would not tantamount to acquiring of a capital asset. Even where after expiry of the period of the agreement assessee was entitled to use the technical know-how, the payment would still be on revenue account.</p><p align="justify">This decision of the Bombay High Court goes to obliterate the difference between the transfer of technical know-how and the mere user of the same. We are conscious of the fact that in the case referred to above, the court was concerned whether payment for technical know-how would be in the nature of revenue expenditure or capital expenditure, and it was in that context these observations were made by the court. A reference to this decision has only been made to bring to focus the fact that the payment for transfer of technical know-how is not in any way different from the payment of user of the same. It is necessary to state in this connection that assessee had sought to highlight that the payment in this case was made only for the transfer of the technical know-how and this argument was sought to be augmented by stating that there was no provision in the agreement for the return of the documents after the expiry of the agreement. This, for the reasons aforesaid, cannot be accepted as valid. Though the agreement stipulates an initial lump sum payment which is the subject matter of dispute before us and the periodical payments based on commercial production the agreement ensures continuance relationship and a free flow of advice not only in the matter of production process but also in the matter of advising, selecting and procuring machinery and equipment and the like. The agreement has to be read as a whole and it would be clear that it is intended to provide in a continuous manner the technical know-how necessary in the production process. Though separate consideration has been stipulated for the initial disclosure and subsequent supply of technical know-how and the like we are of the opinion, that the same should make no difference. As observed earlier, payment for acquiring the technical know-how, is merely a payment for user of the know-how only as there cannot be any permanence in the matter of acquisition of retention of technical know-how because of the rapid changes in the technology and scientific development of technical know-how. The technical know-how agreements clearly contemplate an initial transfer and subsequent advice and information on development involved in improvement and the like in technology. In such circumstances, to hold that the payment is for the transfer of technology outright and such payment is different from the payment for user would be of no help. We, for this reason, shall uphold the order of the CIT.',
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		(int) 42 => '1980'
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		(int) 0 => 'Atlas Copco'
	),
	'ORDINAL' => array(
		(int) 0 => 'first',
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$desc = array(
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		'id' => '64450',
		'acts' => null,
		'appealno' => null,
		'appellant' => 'Atlas Copco A.B. of Sweden',
		'authreffered' => null,
		'casename' => 'Atlas Copco A.B. of Sweden Vs. Inspecting Assistant',
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		'court' => 'Income Tax Appellate Tribunal ITAT Mumbai',
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		'decidedon' => '1990-11-23',
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		'judge' => 'N Prabhu, G Israni',
		'judgement' => ' 1. The appeal is directed against the order of the CIT under the provisions of Section 263 of the Act.</p><p align="justify">2. Assessee is a non-resident Swedish company and had entered into an agreement with M/s. Atlas Copco (India) Ltd., for the supply of know-how for the manufacture of Screw type compressors and also to render technical assistance that might be required in the said manufacture. For this, assessee was to receive a lump sum consideration of US $75,000 in three equal instalments of US $25,000 each. Out of the said amount of US $ 75,000, two instalments of US$ 25,000 were received by the assessee during the previous year relevant to the assessment year 1983-84. The assessment for this year 1982-83 was completed on a total income of Rs. 11,56,800 being dividend income received by the assessee from the Indian company, viz., Atlas Copco (India) Ltd. The Assessing Officer accepted the contention of the assessee that the first two instalments as per the agreement dated 4-2-1981, due during the previous year relevant to the assessment year, were in fact received in the subsequent year and those would be taken into account on receipt basis in subsequent years.</p><p align="justify">3. The CIT had an occasion to peruse the income-tax records of the assessee. He came to the conclusion that these amounts were taxable on the accrual basis and in so far as the amounts were excluded by the Assessing Officer from the total income of the year under appeal he considered the order passed as erroneous being prejudicial to the interest of the revenue. He, accordingly, issued a show-cause notice to the assessee. He rejected the contention of the assessee that the amounts received were for technical services, as according to him, it was manifest that the lump sum amount was not payable to the assessee for rendering any technical services. He further held that the lump sum consideration receivable by the assessee would clearly constitute royalty as defined in Article VII of DTA agreement between India and Sweden and such royalty would be taxable on accrual basis. He set aside the order of the Assessing Officer and directed him to re-do the assessment after including the said amount on the basis that it had accrued or arisen or deemed to have accrued or arisen. He further observed that in that view, it was not permissible to include the aforesaid instalments in computing the total income of the assessee company for the assessment year 1983-84. It may be mentioned in this connection that the Assessing Officer had completed the assessment for the subsequent year, viz., 1983-84, including these amounts in the total income. Assessee is aggrieved. It may be stated that the order for 1983-84 was the subject matter of an appeal before the CIT(A). It was argued before the CIT(A) that the amount received by the assessee from the Indian company for disclosure and supply of know-how outside India constituted industrial or commercial profits within the meaning of that expression in Article III of DTA agreement between India and Sweden and since assessee had no permanent establishment in India, the same would not be exigible to tax. The CIT(A), however, held that the amount was in the nature of taxable royalty. He further observed that the said amount was also taxable on 40%. Subsequently, on an application moved by the assessee, the CIT(A) modified his order and directed the ITO that since the transfer of technical know-how was outside India, consideration for the same would be exigible to tax only at 20%. He also accepted the submissions of the assessee that since this amount was found to be taxable by the Assessing Officer in the assessment year 1982-83, the same could not be taxed in the year 1983-84. This order has become final; in the sense that neither the department nor assessee had filed any appeal before the Tribunal.</p><p align="justify">4. It is now contended by the learned counsel for the assessee that the order passed by the CIT under Section 263 is nonest in the eye of the law. The order for the assessment year 1983-84 was passed by the Assessing Officer on 16-10-1985 including the two instalments due as per the agreement with the Indian company in the total income of the assessee. The revisional order under Section 263 was passed on 10-6-1986. It is, therefore, difficult to conceive how the order passed by the Assessing Officer was erroneous being prejudicial to the revenue. The income had already suffered tax in the assessment year 1983-84. Even if there was an error in the order passed by the Assessing Officer in the assessment year 1982-83, in view of the fact that the amount had suffered tax in the year 1983-84 on a receipt basis, it would not be correct to hold that the order passed by the Assessing Officer has caused prejudiced to the revenue. Assumption of jurisdiction by the CIT under Section 263 is, therefore, not justified.</p><p align="justify">Assessee further invites our attention to the fact that while completing the assessment for the assessment year 1982-83 as per the directions of the CIT under Section 263, the Assessing Officer has initiated penalty under Section 271(1)(c) and, if prejudiced is caused.</p><p align="justify">it was to the assessee and not to the department. It is then pointed out that the Assessing Officer's order cannot also be regarded as erroneous for yet another reason. Assessee has been maintaining a method of accounting under which receipts of this nature are accounted for on cash basis. The amount, if taxable at all, could be in the assessment year 1983-84 and the Assessing Officer has rightly included the amount in the assessment of that year. The decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119ITR 573 to the effect that the royalty income receivable by non-resident is taxable on accrual basis, could be distinguished and as a matter of fact, Unas been, in the decision in I AC v. Reinz Dichtungs GmbH [1989] 31 ITD 67 (Delhi) (SB). In that case the Tribunal was held that where the assessee has regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was accepted by the revenue for earlier years and approved by the Tribunal too, the revenue was not justified in converting it into mercantile system unilaterally.</p><p align="justify">In the light of this decision also it would appear that the order passed by the Assessing Officer for the assessment year 1982-83 or 1983-84 did not suffer from any apparent or glaring mistake to justify the action under Section 263 by the CIT. Adverting to the more basic issue, viz., whether the income was chargeable to tax at all in India in the light of the DTA agreement between Sweden and India, it is contended that what is taxable in India by way of royalty is royalty for the right to use copyright, artistic or scientific works, patents, models, designs, plans, secret process or trade mark etc., and this would be evident from Article 7 of the DTA agreement. Thus, where the payment is for transfer of designs and technical know-how outside India and not for the user in India there would be no justification for including such payments received by the non-resident in the total income. In this case, it is contended, there was no stipulation in the agreement that the designs and drawings and other technical data furnished by the assessee was to be returned to the assessee after the stipulated period or after the agreement had come to an end. As a matter of fact, the decision of the CIT(A) to bring to tax the royalty received by assessee at 20%, would clearly go to show that the payment is not for the user but for a transfer as under Section 115 A of the Act. Tax at 20% is leviable only for transfer outside India of any data documentation etc. The assessee fairly concedes that payment by the Indian company under the agreement would be in the nature of industrial and commercial profits. But since the assessee had no permanent establishment in India, the same would not be exigible. By virtue of the definition of royalty as contained in Article VII of the DTA agreement, the amount received by the assessee cannot be regarded as royalty. The reliance on secrecy clause, as contained in Article 9 of the agreement between the assessee and the Indian company, is not going to, advance the case of the department. The clause relating to the non-disclosure of technical know-how or technical information, has been included to safeguard the worldwide interest of assessee and such clause could be seen in any technical know-how agreement. It cannot be used as an aid in interpreting the nature of payment receivable by the non-resident, who had agreed to impart with the technical know-how or technical knowledge.</p><p align="justify">5. The learned Departmental Representative, on the other hand, contends that the order of the CIT does not contain any specific directions. It is only to the effect that if the amounts are taxable, the proper year should be the year 1982-83 and not 1983-84 as has been held by the Assessing Officer. It is then pointed out that the order for 1983-84 where the amount was first brought to tax assessee had not taken any plea to this effect. At any rate, that part of the order of the CIT(A) for that year under which the amount is taxable as royalty has not been challenged by the assessee. The Departmental Representative further invites our attention to the decision of the Tribunal in the case of Atlas Copco MCT AB of Sweden [IT Appeal Nos. 4999 to 5001(Bom.)of 983).</p><p align="justify">where in similiar circumstances, the "Tribunal has taken the view that royalty due to the assessee was taxable in India.</p><p align="justify">6. The learned counsel for assessee in reply contends that the order for the assessment year 1983-84 by the CIT(A) was not challenged because no part of royalty income was included in the total income.</p><p align="justify">Assessee, in such circumstances, could not be said to be aggrieved and an appeal probably would not lie. As regards the Departmental Representative's reliance on the Tribunal's order in Atlas Copco MCT AB of Sweden's case (supra) it is contended that though that decision has gone against the assessee, it would be of no help in deciding the fresh issue that has been raised in this appeal. In that case the Tribunal probably took the view adverse to the assessee by applying the source rule. The Tribunal took the view that the source of the non-resident assessee's income was situated in India and, therefore, the income by way of royalty was chargeable to tax in India. Assessee's argument, that it was the agreement that was the source of income, was rejected by the Tribunal. In this case the definition of royalty as contained in Article VII of DTA agreement is quite clear and the amount received or due to a non-resident, could be taxed by way of royalty, if the same is for user of technical know-how imparted under an agreement and not for a transfer. In this connection, assessee relies on the decisions of the Bombay High Court reported in CIT v. Emco. Electro (P.) Ltd. [1979] 118 ITR 864 (Bom.) and CIT v. Asian Electronics Ltd. [1989] 177 ITR 60(Bom.) where the court has held that depreciation and development rebate are admissible on payments made for acquisition of technical know-how. It is then submitted that depreciation is admissible to the owner of an asset and, therefore, if the ratio of these two decisions are applied it would be clear that the assessee who has paid for the acquisition of technical know-how, is the owner of the assets. Replying to a pointed question from the Bench, assessee submits that the amount received by assessee could be in the nature of revenue income and the paying party could claim it as revenue expenditure; but that by itself is not going to detract from the merits of assessee's case. The amounts received by assessee are in the nature of business income or industrial or commercial profits but tax could not be levied for the reason, as stated earlier, assessee has no permanent establishment. But that would not automatically convert the receipts into royalties as royalties could only mean payment received for user of certain rights spelt out in Article VII of the DTA agreement. Assessee also contends that there is absolutely no merit in the arguments of the Departmental Representative that the order of the CIT did not contain any specific directions and this would be very clear if one goes through para 7 of the CIT's order. In the said para, the CIT has clearly held that the two instalments aggregating to US $ 50,000 which accrued to the assessee company during the previous year relevant to the assessment year 1982-83 were chargeable to tax in India as income by way of royalty in terms of Article VII of the DTA agreement. It was, therefore, incumbent on the Assessing Officer to assess such income for the assessment year 1982-83. The CIT has left nothing to guess. It is then submitted that both on the preliminary ground, viz., for want of jurisdiction and also on merits, the order passed by the CIT is liable to be cancelled.</p><p align="justify">7. We have heard the parties to the dispute and in our view the order passed by the CIT has to be upheld. The Madras High Court in Standard Triumph Motor Co. Ltd.'s case (supra) has clearly held that royalty income due to a non-resident has to be taxed on accrual basis. Reliance by assessee, in this connection, on the Tribunal' s decision in Standard Triumph Motor Co. Ltd.' s case (supra) is misplaced. That was a case where assessee had regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was also accepted by the revenue and the Tribunal in the earlier years. It was in that context the Tribunal held that the system of accounting which had been followed regularly by an assessee and accepted by the department could not be unilaterally changed by the revenue. In this case no material has been produced before us that the method of accounting followed by assessee is the cash basis. Assessee tried to explain this position by stating that assessee's only source of income is royalty and dividend income and the maintenance of books of accounts in India in the circumstances indicating the method of accounting cannot be insisted upon. Thus, it would be clear that in the premises, stated by the assessee regarding the maintenance of books of accounts, the facts in Standard Triumph Motor Co. Ltd.'s (supra) are not on all fours with the facts as in this case and that decision, therefore, would be inapplicable. Coming to the other argument, that there was no prejudice to the revenue, inasmuch as when the CIT took action under Section 263 the amount was already included and taxed in the total income for the assessment year 1982-83, is also to be rejected. The prejudice contemplated under Section 263 has to be construed as prejudice to the tax administration. It has to be remembered in this connection that the provisions of Section 263 are not revenue raising measures. They are intended to set right the mistakes committed by the Assessing Officer which has caused prejudice to the revenue. The prejudice has, therefore, not to be measured in terms of rupees and paise. In this case the Assessing Officer had proceeded to tax the amount on a receipt basis though there was a decision of the High Court to the effect that in the case of a non-resident royalty income has to be taxed on accrual basis. By accepting the receipts as the proper basis for taxation, a prejudice has been caused to the revenue and if the CIT had taken rectificatory action, the same cannot be construed as without jurisdiction. It may not be out of place to mention that the prejudice contemplated under Section 263 has not necessarily to be an immediate prejudice. We, therefore, uphold the action of the CIT in initiating and passing an order under Section 263 of the Act.</p><p align="justify">That takes us to the more substantial issue whether the income could be taxed in India as royalty. The assessee was fair enough to concede that on the basis of source rule, the Tribunal has decided the issue in Atlas Copco MCTAB of Sweden's case (supra) and also in the case of First ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Bom.) against the assessee and in favour of the revenue. We, therefore, following these decisions shall hold that the source of this income is in India. The next question that comes for consideration is whether the amount received by assessee was in the nature of royalty. In this eloquent arguments, the learned counsel for assessee, tries to demolish the case of the revenue by pointing out that what could be regarded as royalty is the consideration received for user and that where transfer outright is involved the same could not be regarded as royalty. In the first flush, the contention raised on behalf of assessee appears to be attractive but the use of the word "transfer" in Section U5A(b)(ii), to which a reference has been made and on which assessee has set a lot of store by, would not be helpful at all. The word "transfer" in that section would appear only to indicate the place where the technical know-how including, designs, drawings etc., were made available to assessee for the purpose of determining the rate of tax. It cannot be construed as making a distinction between the transfer outright or a transfer only for the purpose of user of scientific data, copyright etc. In the present day condition of rapid scientific developments, a distinction between the transfer of technology and its user is a futile exercise. We shall in this connection refer to the decision of the Bombay High Court in CIT v. American Consulting Corporation [1980] 123ITR513 (Ori.). In that case the court has held that acquiring of technical know-how and technical advice would not tantamount to acquiring of a capital asset. Even where after expiry of the period of the agreement assessee was entitled to use the technical know-how, the payment would still be on revenue account.</p><p align="justify">This decision of the Bombay High Court goes to obliterate the difference between the transfer of technical know-how and the mere user of the same. We are conscious of the fact that in the case referred to above, the court was concerned whether payment for technical know-how would be in the nature of revenue expenditure or capital expenditure, and it was in that context these observations were made by the court. A reference to this decision has only been made to bring to focus the fact that the payment for transfer of technical know-how is not in any way different from the payment of user of the same. It is necessary to state in this connection that assessee had sought to highlight that the payment in this case was made only for the transfer of the technical know-how and this argument was sought to be augmented by stating that there was no provision in the agreement for the return of the documents after the expiry of the agreement. This, for the reasons aforesaid, cannot be accepted as valid. Though the agreement stipulates an initial lump sum payment which is the subject matter of dispute before us and the periodical payments based on commercial production the agreement ensures continuance relationship and a free flow of advice not only in the matter of production process but also in the matter of advising, selecting and procuring machinery and equipment and the like. The agreement has to be read as a whole and it would be clear that it is intended to provide in a continuous manner the technical know-how necessary in the production process. Though separate consideration has been stipulated for the initial disclosure and subsequent supply of technical know-how and the like we are of the opinion, that the same should make no difference. As observed earlier, payment for acquiring the technical know-how, is merely a payment for user of the know-how only as there cannot be any permanence in the matter of acquisition of retention of technical know-how because of the rapid changes in the technology and scientific development of technical know-how. The technical know-how agreements clearly contemplate an initial transfer and subsequent advice and information on development involved in improvement and the like in technology. In such circumstances, to hold that the payment is for the transfer of technology outright and such payment is different from the payment for user would be of no help. We, for this reason, shall uphold the order of the CIT.',
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Warning (2): Invalid argument supplied for foreach() [APP/View/Case/meta.ctp, line 39]
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		'Judgement' => array(
			'id' => '64450',
			'acts' => null,
			'appealno' => null,
			'appellant' => 'Atlas Copco A.B. of Sweden',
			'authreffered' => null,
			'casename' => 'Atlas Copco A.B. of Sweden Vs. Inspecting Assistant',
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			'court' => 'Income Tax Appellate Tribunal ITAT Mumbai',
			'court_type' => 'TRI',
			'decidedon' => '1990-11-23',
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			'favorof' => '',
			'findings' => '',
			'judge' => 'N Prabhu, G Israni',
			'judgement' => ' 1. The appeal is directed against the order of the CIT under the provisions of Section 263 of the Act.</p><p align="justify">2. Assessee is a non-resident Swedish company and had entered into an agreement with M/s. Atlas Copco (India) Ltd., for the supply of know-how for the manufacture of Screw type compressors and also to render technical assistance that might be required in the said manufacture. For this, assessee was to receive a lump sum consideration of US $75,000 in three equal instalments of US $25,000 each. Out of the said amount of US $ 75,000, two instalments of US$ 25,000 were received by the assessee during the previous year relevant to the assessment year 1983-84. The assessment for this year 1982-83 was completed on a total income of Rs. 11,56,800 being dividend income received by the assessee from the Indian company, viz., Atlas Copco (India) Ltd. The Assessing Officer accepted the contention of the assessee that the first two instalments as per the agreement dated 4-2-1981, due during the previous year relevant to the assessment year, were in fact received in the subsequent year and those would be taken into account on receipt basis in subsequent years.</p><p align="justify">3. The CIT had an occasion to peruse the income-tax records of the assessee. He came to the conclusion that these amounts were taxable on the accrual basis and in so far as the amounts were excluded by the Assessing Officer from the total income of the year under appeal he considered the order passed as erroneous being prejudicial to the interest of the revenue. He, accordingly, issued a show-cause notice to the assessee. He rejected the contention of the assessee that the amounts received were for technical services, as according to him, it was manifest that the lump sum amount was not payable to the assessee for rendering any technical services. He further held that the lump sum consideration receivable by the assessee would clearly constitute royalty as defined in Article VII of DTA agreement between India and Sweden and such royalty would be taxable on accrual basis. He set aside the order of the Assessing Officer and directed him to re-do the assessment after including the said amount on the basis that it had accrued or arisen or deemed to have accrued or arisen. He further observed that in that view, it was not permissible to include the aforesaid instalments in computing the total income of the assessee company for the assessment year 1983-84. It may be mentioned in this connection that the Assessing Officer had completed the assessment for the subsequent year, viz., 1983-84, including these amounts in the total income. Assessee is aggrieved. It may be stated that the order for 1983-84 was the subject matter of an appeal before the CIT(A). It was argued before the CIT(A) that the amount received by the assessee from the Indian company for disclosure and supply of know-how outside India constituted industrial or commercial profits within the meaning of that expression in Article III of DTA agreement between India and Sweden and since assessee had no permanent establishment in India, the same would not be exigible to tax. The CIT(A), however, held that the amount was in the nature of taxable royalty. He further observed that the said amount was also taxable on 40%. Subsequently, on an application moved by the assessee, the CIT(A) modified his order and directed the ITO that since the transfer of technical know-how was outside India, consideration for the same would be exigible to tax only at 20%. He also accepted the submissions of the assessee that since this amount was found to be taxable by the Assessing Officer in the assessment year 1982-83, the same could not be taxed in the year 1983-84. This order has become final; in the sense that neither the department nor assessee had filed any appeal before the Tribunal.</p><p align="justify">4. It is now contended by the learned counsel for the assessee that the order passed by the CIT under Section 263 is nonest in the eye of the law. The order for the assessment year 1983-84 was passed by the Assessing Officer on 16-10-1985 including the two instalments due as per the agreement with the Indian company in the total income of the assessee. The revisional order under Section 263 was passed on 10-6-1986. It is, therefore, difficult to conceive how the order passed by the Assessing Officer was erroneous being prejudicial to the revenue. The income had already suffered tax in the assessment year 1983-84. Even if there was an error in the order passed by the Assessing Officer in the assessment year 1982-83, in view of the fact that the amount had suffered tax in the year 1983-84 on a receipt basis, it would not be correct to hold that the order passed by the Assessing Officer has caused prejudiced to the revenue. Assumption of jurisdiction by the CIT under Section 263 is, therefore, not justified.</p><p align="justify">Assessee further invites our attention to the fact that while completing the assessment for the assessment year 1982-83 as per the directions of the CIT under Section 263, the Assessing Officer has initiated penalty under Section 271(1)(c) and, if prejudiced is caused.</p><p align="justify">it was to the assessee and not to the department. It is then pointed out that the Assessing Officer's order cannot also be regarded as erroneous for yet another reason. Assessee has been maintaining a method of accounting under which receipts of this nature are accounted for on cash basis. The amount, if taxable at all, could be in the assessment year 1983-84 and the Assessing Officer has rightly included the amount in the assessment of that year. The decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119ITR 573 to the effect that the royalty income receivable by non-resident is taxable on accrual basis, could be distinguished and as a matter of fact, Unas been, in the decision in I AC v. Reinz Dichtungs GmbH [1989] 31 ITD 67 (Delhi) (SB). In that case the Tribunal was held that where the assessee has regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was accepted by the revenue for earlier years and approved by the Tribunal too, the revenue was not justified in converting it into mercantile system unilaterally.</p><p align="justify">In the light of this decision also it would appear that the order passed by the Assessing Officer for the assessment year 1982-83 or 1983-84 did not suffer from any apparent or glaring mistake to justify the action under Section 263 by the CIT. Adverting to the more basic issue, viz., whether the income was chargeable to tax at all in India in the light of the DTA agreement between Sweden and India, it is contended that what is taxable in India by way of royalty is royalty for the right to use copyright, artistic or scientific works, patents, models, designs, plans, secret process or trade mark etc., and this would be evident from Article 7 of the DTA agreement. Thus, where the payment is for transfer of designs and technical know-how outside India and not for the user in India there would be no justification for including such payments received by the non-resident in the total income. In this case, it is contended, there was no stipulation in the agreement that the designs and drawings and other technical data furnished by the assessee was to be returned to the assessee after the stipulated period or after the agreement had come to an end. As a matter of fact, the decision of the CIT(A) to bring to tax the royalty received by assessee at 20%, would clearly go to show that the payment is not for the user but for a transfer as under Section 115 A of the Act. Tax at 20% is leviable only for transfer outside India of any data documentation etc. The assessee fairly concedes that payment by the Indian company under the agreement would be in the nature of industrial and commercial profits. But since the assessee had no permanent establishment in India, the same would not be exigible. By virtue of the definition of royalty as contained in Article VII of the DTA agreement, the amount received by the assessee cannot be regarded as royalty. The reliance on secrecy clause, as contained in Article 9 of the agreement between the assessee and the Indian company, is not going to, advance the case of the department. The clause relating to the non-disclosure of technical know-how or technical information, has been included to safeguard the worldwide interest of assessee and such clause could be seen in any technical know-how agreement. It cannot be used as an aid in interpreting the nature of payment receivable by the non-resident, who had agreed to impart with the technical know-how or technical knowledge.</p><p align="justify">5. The learned Departmental Representative, on the other hand, contends that the order of the CIT does not contain any specific directions. It is only to the effect that if the amounts are taxable, the proper year should be the year 1982-83 and not 1983-84 as has been held by the Assessing Officer. It is then pointed out that the order for 1983-84 where the amount was first brought to tax assessee had not taken any plea to this effect. At any rate, that part of the order of the CIT(A) for that year under which the amount is taxable as royalty has not been challenged by the assessee. The Departmental Representative further invites our attention to the decision of the Tribunal in the case of Atlas Copco MCT AB of Sweden [IT Appeal Nos. 4999 to 5001(Bom.)of 983).</p><p align="justify">where in similiar circumstances, the "Tribunal has taken the view that royalty due to the assessee was taxable in India.</p><p align="justify">6. The learned counsel for assessee in reply contends that the order for the assessment year 1983-84 by the CIT(A) was not challenged because no part of royalty income was included in the total income.</p><p align="justify">Assessee, in such circumstances, could not be said to be aggrieved and an appeal probably would not lie. As regards the Departmental Representative's reliance on the Tribunal's order in Atlas Copco MCT AB of Sweden's case (supra) it is contended that though that decision has gone against the assessee, it would be of no help in deciding the fresh issue that has been raised in this appeal. In that case the Tribunal probably took the view adverse to the assessee by applying the source rule. The Tribunal took the view that the source of the non-resident assessee's income was situated in India and, therefore, the income by way of royalty was chargeable to tax in India. Assessee's argument, that it was the agreement that was the source of income, was rejected by the Tribunal. In this case the definition of royalty as contained in Article VII of DTA agreement is quite clear and the amount received or due to a non-resident, could be taxed by way of royalty, if the same is for user of technical know-how imparted under an agreement and not for a transfer. In this connection, assessee relies on the decisions of the Bombay High Court reported in CIT v. Emco. Electro (P.) Ltd. [1979] 118 ITR 864 (Bom.) and CIT v. Asian Electronics Ltd. [1989] 177 ITR 60(Bom.) where the court has held that depreciation and development rebate are admissible on payments made for acquisition of technical know-how. It is then submitted that depreciation is admissible to the owner of an asset and, therefore, if the ratio of these two decisions are applied it would be clear that the assessee who has paid for the acquisition of technical know-how, is the owner of the assets. Replying to a pointed question from the Bench, assessee submits that the amount received by assessee could be in the nature of revenue income and the paying party could claim it as revenue expenditure; but that by itself is not going to detract from the merits of assessee's case. The amounts received by assessee are in the nature of business income or industrial or commercial profits but tax could not be levied for the reason, as stated earlier, assessee has no permanent establishment. But that would not automatically convert the receipts into royalties as royalties could only mean payment received for user of certain rights spelt out in Article VII of the DTA agreement. Assessee also contends that there is absolutely no merit in the arguments of the Departmental Representative that the order of the CIT did not contain any specific directions and this would be very clear if one goes through para 7 of the CIT's order. In the said para, the CIT has clearly held that the two instalments aggregating to US $ 50,000 which accrued to the assessee company during the previous year relevant to the assessment year 1982-83 were chargeable to tax in India as income by way of royalty in terms of Article VII of the DTA agreement. It was, therefore, incumbent on the Assessing Officer to assess such income for the assessment year 1982-83. The CIT has left nothing to guess. It is then submitted that both on the preliminary ground, viz., for want of jurisdiction and also on merits, the order passed by the CIT is liable to be cancelled.</p><p align="justify">7. We have heard the parties to the dispute and in our view the order passed by the CIT has to be upheld. The Madras High Court in Standard Triumph Motor Co. Ltd.'s case (supra) has clearly held that royalty income due to a non-resident has to be taxed on accrual basis. Reliance by assessee, in this connection, on the Tribunal' s decision in Standard Triumph Motor Co. Ltd.' s case (supra) is misplaced. That was a case where assessee had regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was also accepted by the revenue and the Tribunal in the earlier years. It was in that context the Tribunal held that the system of accounting which had been followed regularly by an assessee and accepted by the department could not be unilaterally changed by the revenue. In this case no material has been produced before us that the method of accounting followed by assessee is the cash basis. Assessee tried to explain this position by stating that assessee's only source of income is royalty and dividend income and the maintenance of books of accounts in India in the circumstances indicating the method of accounting cannot be insisted upon. Thus, it would be clear that in the premises, stated by the assessee regarding the maintenance of books of accounts, the facts in Standard Triumph Motor Co. Ltd.'s (supra) are not on all fours with the facts as in this case and that decision, therefore, would be inapplicable. Coming to the other argument, that there was no prejudice to the revenue, inasmuch as when the CIT took action under Section 263 the amount was already included and taxed in the total income for the assessment year 1982-83, is also to be rejected. The prejudice contemplated under Section 263 has to be construed as prejudice to the tax administration. It has to be remembered in this connection that the provisions of Section 263 are not revenue raising measures. They are intended to set right the mistakes committed by the Assessing Officer which has caused prejudice to the revenue. The prejudice has, therefore, not to be measured in terms of rupees and paise. In this case the Assessing Officer had proceeded to tax the amount on a receipt basis though there was a decision of the High Court to the effect that in the case of a non-resident royalty income has to be taxed on accrual basis. By accepting the receipts as the proper basis for taxation, a prejudice has been caused to the revenue and if the CIT had taken rectificatory action, the same cannot be construed as without jurisdiction. It may not be out of place to mention that the prejudice contemplated under Section 263 has not necessarily to be an immediate prejudice. We, therefore, uphold the action of the CIT in initiating and passing an order under Section 263 of the Act.</p><p align="justify">That takes us to the more substantial issue whether the income could be taxed in India as royalty. The assessee was fair enough to concede that on the basis of source rule, the Tribunal has decided the issue in Atlas Copco MCTAB of Sweden's case (supra) and also in the case of First ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Bom.) against the assessee and in favour of the revenue. We, therefore, following these decisions shall hold that the source of this income is in India. The next question that comes for consideration is whether the amount received by assessee was in the nature of royalty. In this eloquent arguments, the learned counsel for assessee, tries to demolish the case of the revenue by pointing out that what could be regarded as royalty is the consideration received for user and that where transfer outright is involved the same could not be regarded as royalty. In the first flush, the contention raised on behalf of assessee appears to be attractive but the use of the word "transfer" in Section U5A(b)(ii), to which a reference has been made and on which assessee has set a lot of store by, would not be helpful at all. The word "transfer" in that section would appear only to indicate the place where the technical know-how including, designs, drawings etc., were made available to assessee for the purpose of determining the rate of tax. It cannot be construed as making a distinction between the transfer outright or a transfer only for the purpose of user of scientific data, copyright etc. In the present day condition of rapid scientific developments, a distinction between the transfer of technology and its user is a futile exercise. We shall in this connection refer to the decision of the Bombay High Court in CIT v. American Consulting Corporation [1980] 123ITR513 (Ori.). In that case the court has held that acquiring of technical know-how and technical advice would not tantamount to acquiring of a capital asset. Even where after expiry of the period of the agreement assessee was entitled to use the technical know-how, the payment would still be on revenue account.</p><p align="justify">This decision of the Bombay High Court goes to obliterate the difference between the transfer of technical know-how and the mere user of the same. We are conscious of the fact that in the case referred to above, the court was concerned whether payment for technical know-how would be in the nature of revenue expenditure or capital expenditure, and it was in that context these observations were made by the court. A reference to this decision has only been made to bring to focus the fact that the payment for transfer of technical know-how is not in any way different from the payment of user of the same. It is necessary to state in this connection that assessee had sought to highlight that the payment in this case was made only for the transfer of the technical know-how and this argument was sought to be augmented by stating that there was no provision in the agreement for the return of the documents after the expiry of the agreement. This, for the reasons aforesaid, cannot be accepted as valid. Though the agreement stipulates an initial lump sum payment which is the subject matter of dispute before us and the periodical payments based on commercial production the agreement ensures continuance relationship and a free flow of advice not only in the matter of production process but also in the matter of advising, selecting and procuring machinery and equipment and the like. The agreement has to be read as a whole and it would be clear that it is intended to provide in a continuous manner the technical know-how necessary in the production process. Though separate consideration has been stipulated for the initial disclosure and subsequent supply of technical know-how and the like we are of the opinion, that the same should make no difference. As observed earlier, payment for acquiring the technical know-how, is merely a payment for user of the know-how only as there cannot be any permanence in the matter of acquisition of retention of technical know-how because of the rapid changes in the technology and scientific development of technical know-how. The technical know-how agreements clearly contemplate an initial transfer and subsequent advice and information on development involved in improvement and the like in technology. In such circumstances, to hold that the payment is for the transfer of technology outright and such payment is different from the payment for user would be of no help. We, for this reason, shall uphold the order of the CIT.',
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$title_for_layout = 'Atlas Copco A.B. of Sweden Vs. Inspecting Assistant Semantic Analysis'
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		(int) 20 => 'Atlas Copco MCT AB',
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		(int) 1 => 'year 1983-84',
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		(int) 35 => 'the previous year',
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	'Judgement' => array(
		'id' => '64450',
		'acts' => null,
		'appealno' => null,
		'appellant' => 'Atlas Copco A.B. of Sweden',
		'authreffered' => null,
		'casename' => 'Atlas Copco A.B. of Sweden Vs. Inspecting Assistant',
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		'court' => 'Income Tax Appellate Tribunal ITAT Mumbai',
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		'decidedon' => '1990-11-23',
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		'judge' => 'N Prabhu, G Israni',
		'judgement' => ' 1. The appeal is directed against the order of the CIT under the provisions of Section 263 of the Act.</p><p align="justify">2. Assessee is a non-resident Swedish company and had entered into an agreement with M/s. Atlas Copco (India) Ltd., for the supply of know-how for the manufacture of Screw type compressors and also to render technical assistance that might be required in the said manufacture. For this, assessee was to receive a lump sum consideration of US $75,000 in three equal instalments of US $25,000 each. Out of the said amount of US $ 75,000, two instalments of US$ 25,000 were received by the assessee during the previous year relevant to the assessment year 1983-84. The assessment for this year 1982-83 was completed on a total income of Rs. 11,56,800 being dividend income received by the assessee from the Indian company, viz., Atlas Copco (India) Ltd. The Assessing Officer accepted the contention of the assessee that the first two instalments as per the agreement dated 4-2-1981, due during the previous year relevant to the assessment year, were in fact received in the subsequent year and those would be taken into account on receipt basis in subsequent years.</p><p align="justify">3. The CIT had an occasion to peruse the income-tax records of the assessee. He came to the conclusion that these amounts were taxable on the accrual basis and in so far as the amounts were excluded by the Assessing Officer from the total income of the year under appeal he considered the order passed as erroneous being prejudicial to the interest of the revenue. He, accordingly, issued a show-cause notice to the assessee. He rejected the contention of the assessee that the amounts received were for technical services, as according to him, it was manifest that the lump sum amount was not payable to the assessee for rendering any technical services. He further held that the lump sum consideration receivable by the assessee would clearly constitute royalty as defined in Article VII of DTA agreement between India and Sweden and such royalty would be taxable on accrual basis. He set aside the order of the Assessing Officer and directed him to re-do the assessment after including the said amount on the basis that it had accrued or arisen or deemed to have accrued or arisen. He further observed that in that view, it was not permissible to include the aforesaid instalments in computing the total income of the assessee company for the assessment year 1983-84. It may be mentioned in this connection that the Assessing Officer had completed the assessment for the subsequent year, viz., 1983-84, including these amounts in the total income. Assessee is aggrieved. It may be stated that the order for 1983-84 was the subject matter of an appeal before the CIT(A). It was argued before the CIT(A) that the amount received by the assessee from the Indian company for disclosure and supply of know-how outside India constituted industrial or commercial profits within the meaning of that expression in Article III of DTA agreement between India and Sweden and since assessee had no permanent establishment in India, the same would not be exigible to tax. The CIT(A), however, held that the amount was in the nature of taxable royalty. He further observed that the said amount was also taxable on 40%. Subsequently, on an application moved by the assessee, the CIT(A) modified his order and directed the ITO that since the transfer of technical know-how was outside India, consideration for the same would be exigible to tax only at 20%. He also accepted the submissions of the assessee that since this amount was found to be taxable by the Assessing Officer in the assessment year 1982-83, the same could not be taxed in the year 1983-84. This order has become final; in the sense that neither the department nor assessee had filed any appeal before the Tribunal.</p><p align="justify">4. It is now contended by the learned counsel for the assessee that the order passed by the CIT under Section 263 is nonest in the eye of the law. The order for the assessment year 1983-84 was passed by the Assessing Officer on 16-10-1985 including the two instalments due as per the agreement with the Indian company in the total income of the assessee. The revisional order under Section 263 was passed on 10-6-1986. It is, therefore, difficult to conceive how the order passed by the Assessing Officer was erroneous being prejudicial to the revenue. The income had already suffered tax in the assessment year 1983-84. Even if there was an error in the order passed by the Assessing Officer in the assessment year 1982-83, in view of the fact that the amount had suffered tax in the year 1983-84 on a receipt basis, it would not be correct to hold that the order passed by the Assessing Officer has caused prejudiced to the revenue. Assumption of jurisdiction by the CIT under Section 263 is, therefore, not justified.</p><p align="justify">Assessee further invites our attention to the fact that while completing the assessment for the assessment year 1982-83 as per the directions of the CIT under Section 263, the Assessing Officer has initiated penalty under Section 271(1)(c) and, if prejudiced is caused.</p><p align="justify">it was to the assessee and not to the department. It is then pointed out that the Assessing Officer's order cannot also be regarded as erroneous for yet another reason. Assessee has been maintaining a method of accounting under which receipts of this nature are accounted for on cash basis. The amount, if taxable at all, could be in the assessment year 1983-84 and the Assessing Officer has rightly included the amount in the assessment of that year. The decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd. [1979] 119ITR 573 to the effect that the royalty income receivable by non-resident is taxable on accrual basis, could be distinguished and as a matter of fact, Unas been, in the decision in I AC v. Reinz Dichtungs GmbH [1989] 31 ITD 67 (Delhi) (SB). In that case the Tribunal was held that where the assessee has regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was accepted by the revenue for earlier years and approved by the Tribunal too, the revenue was not justified in converting it into mercantile system unilaterally.</p><p align="justify">In the light of this decision also it would appear that the order passed by the Assessing Officer for the assessment year 1982-83 or 1983-84 did not suffer from any apparent or glaring mistake to justify the action under Section 263 by the CIT. Adverting to the more basic issue, viz., whether the income was chargeable to tax at all in India in the light of the DTA agreement between Sweden and India, it is contended that what is taxable in India by way of royalty is royalty for the right to use copyright, artistic or scientific works, patents, models, designs, plans, secret process or trade mark etc., and this would be evident from Article 7 of the DTA agreement. Thus, where the payment is for transfer of designs and technical know-how outside India and not for the user in India there would be no justification for including such payments received by the non-resident in the total income. In this case, it is contended, there was no stipulation in the agreement that the designs and drawings and other technical data furnished by the assessee was to be returned to the assessee after the stipulated period or after the agreement had come to an end. As a matter of fact, the decision of the CIT(A) to bring to tax the royalty received by assessee at 20%, would clearly go to show that the payment is not for the user but for a transfer as under Section 115 A of the Act. Tax at 20% is leviable only for transfer outside India of any data documentation etc. The assessee fairly concedes that payment by the Indian company under the agreement would be in the nature of industrial and commercial profits. But since the assessee had no permanent establishment in India, the same would not be exigible. By virtue of the definition of royalty as contained in Article VII of the DTA agreement, the amount received by the assessee cannot be regarded as royalty. The reliance on secrecy clause, as contained in Article 9 of the agreement between the assessee and the Indian company, is not going to, advance the case of the department. The clause relating to the non-disclosure of technical know-how or technical information, has been included to safeguard the worldwide interest of assessee and such clause could be seen in any technical know-how agreement. It cannot be used as an aid in interpreting the nature of payment receivable by the non-resident, who had agreed to impart with the technical know-how or technical knowledge.</p><p align="justify">5. The learned Departmental Representative, on the other hand, contends that the order of the CIT does not contain any specific directions. It is only to the effect that if the amounts are taxable, the proper year should be the year 1982-83 and not 1983-84 as has been held by the Assessing Officer. It is then pointed out that the order for 1983-84 where the amount was first brought to tax assessee had not taken any plea to this effect. At any rate, that part of the order of the CIT(A) for that year under which the amount is taxable as royalty has not been challenged by the assessee. The Departmental Representative further invites our attention to the decision of the Tribunal in the case of Atlas Copco MCT AB of Sweden [IT Appeal Nos. 4999 to 5001(Bom.)of 983).</p><p align="justify">where in similiar circumstances, the "Tribunal has taken the view that royalty due to the assessee was taxable in India.</p><p align="justify">6. The learned counsel for assessee in reply contends that the order for the assessment year 1983-84 by the CIT(A) was not challenged because no part of royalty income was included in the total income.</p><p align="justify">Assessee, in such circumstances, could not be said to be aggrieved and an appeal probably would not lie. As regards the Departmental Representative's reliance on the Tribunal's order in Atlas Copco MCT AB of Sweden's case (supra) it is contended that though that decision has gone against the assessee, it would be of no help in deciding the fresh issue that has been raised in this appeal. In that case the Tribunal probably took the view adverse to the assessee by applying the source rule. The Tribunal took the view that the source of the non-resident assessee's income was situated in India and, therefore, the income by way of royalty was chargeable to tax in India. Assessee's argument, that it was the agreement that was the source of income, was rejected by the Tribunal. In this case the definition of royalty as contained in Article VII of DTA agreement is quite clear and the amount received or due to a non-resident, could be taxed by way of royalty, if the same is for user of technical know-how imparted under an agreement and not for a transfer. In this connection, assessee relies on the decisions of the Bombay High Court reported in CIT v. Emco. Electro (P.) Ltd. [1979] 118 ITR 864 (Bom.) and CIT v. Asian Electronics Ltd. [1989] 177 ITR 60(Bom.) where the court has held that depreciation and development rebate are admissible on payments made for acquisition of technical know-how. It is then submitted that depreciation is admissible to the owner of an asset and, therefore, if the ratio of these two decisions are applied it would be clear that the assessee who has paid for the acquisition of technical know-how, is the owner of the assets. Replying to a pointed question from the Bench, assessee submits that the amount received by assessee could be in the nature of revenue income and the paying party could claim it as revenue expenditure; but that by itself is not going to detract from the merits of assessee's case. The amounts received by assessee are in the nature of business income or industrial or commercial profits but tax could not be levied for the reason, as stated earlier, assessee has no permanent establishment. But that would not automatically convert the receipts into royalties as royalties could only mean payment received for user of certain rights spelt out in Article VII of the DTA agreement. Assessee also contends that there is absolutely no merit in the arguments of the Departmental Representative that the order of the CIT did not contain any specific directions and this would be very clear if one goes through para 7 of the CIT's order. In the said para, the CIT has clearly held that the two instalments aggregating to US $ 50,000 which accrued to the assessee company during the previous year relevant to the assessment year 1982-83 were chargeable to tax in India as income by way of royalty in terms of Article VII of the DTA agreement. It was, therefore, incumbent on the Assessing Officer to assess such income for the assessment year 1982-83. The CIT has left nothing to guess. It is then submitted that both on the preliminary ground, viz., for want of jurisdiction and also on merits, the order passed by the CIT is liable to be cancelled.</p><p align="justify">7. We have heard the parties to the dispute and in our view the order passed by the CIT has to be upheld. The Madras High Court in Standard Triumph Motor Co. Ltd.'s case (supra) has clearly held that royalty income due to a non-resident has to be taxed on accrual basis. Reliance by assessee, in this connection, on the Tribunal' s decision in Standard Triumph Motor Co. Ltd.' s case (supra) is misplaced. That was a case where assessee had regularly and consistently kept its accounts in respect of royalty income on receipt basis and that was also accepted by the revenue and the Tribunal in the earlier years. It was in that context the Tribunal held that the system of accounting which had been followed regularly by an assessee and accepted by the department could not be unilaterally changed by the revenue. In this case no material has been produced before us that the method of accounting followed by assessee is the cash basis. Assessee tried to explain this position by stating that assessee's only source of income is royalty and dividend income and the maintenance of books of accounts in India in the circumstances indicating the method of accounting cannot be insisted upon. Thus, it would be clear that in the premises, stated by the assessee regarding the maintenance of books of accounts, the facts in Standard Triumph Motor Co. Ltd.'s (supra) are not on all fours with the facts as in this case and that decision, therefore, would be inapplicable. Coming to the other argument, that there was no prejudice to the revenue, inasmuch as when the CIT took action under Section 263 the amount was already included and taxed in the total income for the assessment year 1982-83, is also to be rejected. The prejudice contemplated under Section 263 has to be construed as prejudice to the tax administration. It has to be remembered in this connection that the provisions of Section 263 are not revenue raising measures. They are intended to set right the mistakes committed by the Assessing Officer which has caused prejudice to the revenue. The prejudice has, therefore, not to be measured in terms of rupees and paise. In this case the Assessing Officer had proceeded to tax the amount on a receipt basis though there was a decision of the High Court to the effect that in the case of a non-resident royalty income has to be taxed on accrual basis. By accepting the receipts as the proper basis for taxation, a prejudice has been caused to the revenue and if the CIT had taken rectificatory action, the same cannot be construed as without jurisdiction. It may not be out of place to mention that the prejudice contemplated under Section 263 has not necessarily to be an immediate prejudice. We, therefore, uphold the action of the CIT in initiating and passing an order under Section 263 of the Act.</p><p align="justify">That takes us to the more substantial issue whether the income could be taxed in India as royalty. The assessee was fair enough to concede that on the basis of source rule, the Tribunal has decided the issue in Atlas Copco MCTAB of Sweden's case (supra) and also in the case of First ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Bom.) against the assessee and in favour of the revenue. We, therefore, following these decisions shall hold that the source of this income is in India. The next question that comes for consideration is whether the amount received by assessee was in the nature of royalty. In this eloquent arguments, the learned counsel for assessee, tries to demolish the case of the revenue by pointing out that what could be regarded as royalty is the consideration received for user and that where transfer outright is involved the same could not be regarded as royalty. In the first flush, the contention raised on behalf of assessee appears to be attractive but the use of the word "transfer" in Section U5A(b)(ii), to which a reference has been made and on which assessee has set a lot of store by, would not be helpful at all. The word "transfer" in that section would appear only to indicate the place where the technical know-how including, designs, drawings etc., were made available to assessee for the purpose of determining the rate of tax. It cannot be construed as making a distinction between the transfer outright or a transfer only for the purpose of user of scientific data, copyright etc. In the present day condition of rapid scientific developments, a distinction between the transfer of technology and its user is a futile exercise. We shall in this connection refer to the decision of the Bombay High Court in CIT v. American Consulting Corporation [1980] 123ITR513 (Ori.). In that case the court has held that acquiring of technical know-how and technical advice would not tantamount to acquiring of a capital asset. Even where after expiry of the period of the agreement assessee was entitled to use the technical know-how, the payment would still be on revenue account.</p><p align="justify">This decision of the Bombay High Court goes to obliterate the difference between the transfer of technical know-how and the mere user of the same. We are conscious of the fact that in the case referred to above, the court was concerned whether payment for technical know-how would be in the nature of revenue expenditure or capital expenditure, and it was in that context these observations were made by the court. A reference to this decision has only been made to bring to focus the fact that the payment for transfer of technical know-how is not in any way different from the payment of user of the same. It is necessary to state in this connection that assessee had sought to highlight that the payment in this case was made only for the transfer of the technical know-how and this argument was sought to be augmented by stating that there was no provision in the agreement for the return of the documents after the expiry of the agreement. This, for the reasons aforesaid, cannot be accepted as valid. Though the agreement stipulates an initial lump sum payment which is the subject matter of dispute before us and the periodical payments based on commercial production the agreement ensures continuance relationship and a free flow of advice not only in the matter of production process but also in the matter of advising, selecting and procuring machinery and equipment and the like. The agreement has to be read as a whole and it would be clear that it is intended to provide in a continuous manner the technical know-how necessary in the production process. Though separate consideration has been stipulated for the initial disclosure and subsequent supply of technical know-how and the like we are of the opinion, that the same should make no difference. As observed earlier, payment for acquiring the technical know-how, is merely a payment for user of the know-how only as there cannot be any permanence in the matter of acquisition of retention of technical know-how because of the rapid changes in the technology and scientific development of technical know-how. The technical know-how agreements clearly contemplate an initial transfer and subsequent advice and information on development involved in improvement and the like in technology. In such circumstances, to hold that the payment is for the transfer of technology outright and such payment is different from the payment for user would be of no help. We, for this reason, shall uphold the order of the CIT.',
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LAW: Section 263, Article VII, Article III of DTA, Section 263, Section 263, Section 271(1)(c, Section 263, Article 7 of the DTA, Section 115 A of the Act, Article VII, Article 9, Article VII, Article VII, Article VII, Section 263, Section 263, Section 263, Section 263, Section 263

CARDINAL: 1, Screw, three, two, 11,56,800, two, 4, two, 10-6-1986, 573, 31, 118, 177, two, 7, two, 30

ORG: CIT, M/s. Atlas Copco, CIT, Assessing, ITO, the Assessing Officer, CIT, Standard Triumph Motor Co. Ltd., Unas, AC, Reinz, ITD 67, Tribunal, Tribunal, CIT, DTA, DTA, Departmental Representative, CIT, Tribunal, Atlas Copco MCT AB, the "Tribunal, Tribunal, Atlas Copco MCT AB, Tribunal, Tribunal, Tribunal, DTA, the Bombay High Court, CIT, CIT v. Asian Electronics Ltd., Bench, DTA, CIT, CIT, CIT, DTA, CIT, CIT, CIT, Standard Triumph Motor Co. Ltd.'s, Reliance, Tribunal, Standard Triumph Motor Co. Ltd.', Tribunal, Tribunal, Standard Triumph Motor Co. Ltd.'s, CIT, Assessing, the High Court, CIT, CIT, Tribunal, First ITO v. Automobile Peuggeot, ITD 329, the Bombay High Court, CIT, American Consulting Corporation, the Bombay High Court, CIT

GPE: Assessee, US, US, US, India, Sweden, Assessee, India, India, Sweden, India, India, Assessee, Delhi, India, Sweden, India, India, India, India, India, India, Sweden, Assessee, Sweden, India, India, Assessee, Electro, assessee, assessee, US, India, assessee, India, India, Sweden, India, assessee

NORP: Swedish, Indian, Indian, Indian, Indian, Indian

MONEY: 75,000, 25,000, 75,000, 25,000, 50,000

DATE: the previous year, year 1983-84, this year 1982-83, the previous year, the assessment year, the subsequent year, the year, the assessment year 1983-84, the subsequent year, 1983-84, 1983-84, year 1982-83, the year 1983-84, the assessment year 1983-84, 16-10-1985, year 1983-84, year 1982-83, the year 1983-84, year 1982-83, the assessment year 1983-84, that year, 1979, 1989, earlier years, year 1982-83, 1983-84, the year 1982-83, 1983-84, 1983-84, that year, 4999, 5001(Bom.)of 983).where, the assessment year 1983-84, 1979, 1989, the previous year, year 1982-83, the assessment year 1982-83, the earlier years, the assessment year 1982-83, 1989, the present day, 1980

PERSON: Atlas Copco

ORDINAL: first, first, first

PERCENT: 40%, 20%, 20%, 20%

WORK_OF_ART: Atlas Copco MCTAB