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High Court Of Calcutta
Ajit Kumar Sengupta, Bhagabati Prasad Banerjee
COMMISSIONER OF INCOME-TAX - Appellant
Versus
DAVY ASHMORE INDIA LTD. - Respondent
Income-Tax Reference 53a Of 1988
Decided On : 12/13/1990
INCOME TAX - Whether, on the facts and circumstances of the case, the Appellate Tribunal was correct in law in holding that the payment of 36,470 made by the assessee-company to the foreign party as consideration for outright sale of drawings and design was not 'royalty' exigible to tax under the Income-tax Act, 1961 ?
Fact of the Case:
The assessee company imported concept designs and drawings from a non-resident company for the purpose of manufacturing terminal equipment. The import was approved by the Government of India and the Reserve Bank of India. The assessee paid 36,470 to the non-resident company as consideration for the outright sale of the designs and drawings.
Finding of the Court:
The Tribunal held that there was an outright transfer of the drawings and designs by the non-resident company to the assessee-company and that the payment of 36,470 cannot be taxed by reference to Explanation 2 to Section 9 (1) (vi) of the Income-tax Act, 1961.
Issues: Whether the payment made by the assessee to the non-resident company was in the nature of royalty and exigible to tax under the Income-tax Act, 1961?
Ratio Decidendi: The definition of 'royalty' in the Agreement for Avoidance of Double Taxation between India and the U. K. is different from the definition in Explanation 2 to Section 9 (1) (vi) of the Income-tax Act, 1961. In case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. In the present case, there was an outright sale or purchase of the designs and drawings, and the consideration paid was for the transfer of such designs and drawings, and cannot be treated as royalty.
Final Decision: The question referred to the court is answered in the affirmative and in favor of the assessee. There will be no order as to costs.
( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, the following question of law has been referred to this court:"whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the payment of 36,470 made by the assessee-company to the foreign party as consideration for outright sale of drawings and design was not 'royalty' exigible to tax under the Income-tax Act, 1961 ?"
( 2 ) SHORTLY stated, the facts are as follows : the assessee received a letter of intent from Light Metal Industries Limited (hereinafter referred to as "the LMI") for maintenance and supply of terminal equipment for a secondhand aluminium cold-rolling mill being imported by them for their aluminium-rolled products project at Village Hoera in the District of Hooghly, West Bengal. LMI also issued a purchase order dated March 30, 1984, in terms of which the assessee was to arrange for the import of concept designs and drawings enabling it to prepare the detailed manufacturing drawings for purposes of manufacture of the terminal equipments which were required to be supplied by the assessee as per the letter of intent of LMI.
( 3 ) THE secondhand rolling mill was to be imported by LMI from Davy Makes (Pools) Ltd. , U. K. On receipt of the purchase order and the letter of intent from LMI, the assessee placed an order with Davy Makes (Pools) Limited, U. K. , for the supply of one print each of concept designs and drawings for the terminal equipment. In paragraph 2 of the letter of intent, it specifically mentions that the remittance of the purchase consideration as aforesaid was to be made by telegraphic transfer/demand draft in favour of Davy Makes (Pools) Limited, U. K. (hereinafter referred to as "dmpl") subject to the approval of the Reserve Bank of India. Paragraph 6 of the letter mentions that "the concept designs and drawings shall be imported by us in terms of the approval letter dated April 10, 1984, issued by the Secretariat for Industrial Approval, FCI, Department of Industrial Development, Ministry of Industries, and the delivery of the concept designs and drawings for the items mentioned in paragraph 1 of the letter as extracted above were to be made within four weeks from the date of the remittance of the agreed sum of 36,470 in U. K, In the application made to the Secretariat for Industrial Approval, FCI, Department of Industrial Development, Ministry of Industries, the assessee stated that the purpose for which the application was made was that the concept designs and drawings upon import from DMPL would be used by the company for the preparation of detailed manufacturing drawings. The Ministry of Industries, by letter dated April 10, 1981, granted approval to the import of the designs and drawings from DMPL, U. K. , for the manufacture of terminal equipments for a lump sum payment of 36,470 net of taxes.
( 4 ) ON these facts, the Income-tax Officer took the view that the payments made to the non-resident company were in the nature of royalty within the meaning of Explanation 2 to Section 9 (1) (vi) of the Income-tax Act, 1961, and accordingly, he applied the rate of tax at 20% on the said sum of 36,470. On appeal, the Commissioner of Income-tax (Appeals) took the view that the transaction as approved by the Government of India was merely for the import of designs and drawings from the non-resident against a lump sum payment of 36,470. An import licence was also obtained for the purposes as above under the import policy for the year. According to the Commissioner of Income-tax (Appeals), therefore, the payment to a non-resident company would not be a payment in the nature of royalty.
( 5 ) THE Tribunal, on these facts, confirmed the order of the Commissioner of Income-tax (Appeals) and found that there was a transfer of drawings and designs to the assessee against the lump sum payment of 36,470. In terms of Clause 2 of Article XIII of the Avoidan
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