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2014 Supreme(Del) 2208
High Court of Delhi
SANJIV KHANNA & V. KAMESWAR RAO, JJ.
Commissioner of Income Tax Delhi – I
Versus
M/s. Voest Alpine A.G.
ITA No. 79 of 2001 & 80 of 2001
Decided On : 30-09-2014
For the Appellant : Suruchi Aggarwal, Sr. Standing Counsel.
For the Respondent: None.
The main legal point established in the judgment is the need to differentiate and tax the consideration appropriately based on the distinction between 'royalty' and 'technical services' as defined in the Double Taxation Avoidance Agreement (DTAA) between India and Austria.
Headnote:
Royalty - Taxation under DTAA - Article VI, Article VII - [ARTICLE VI, ARTICLE VII]
Fact of the Case:
The case involved appeals by the Revenue under Section 260A of the Income Tax Act, 1961 pertaining to Assessment Years 1989-90 and 1990-91. The substantial questions of law were related to the nature of a sum received by the assessee in terms of a technical assistance agreement and its classification as royalty.
Finding of the Court:
The court found that the consideration paid for technical services would be taxable under Article VII of the DTAA, to the extent the amounts were attributable to the activities performed by the respondent-assessee in India. Deduction of expenses would be made. Consideration paid for right to use technical information and know-how would be taxable under Article VI of the DTAA. The consideration paid for furnishing technical services outside India shall not be taxable in India.
Issues: The primary issue was the classification and taxation of the consideration received by the assessee under a technical assistance agreement, distinguishing between royalty and technical services under the DTAA.
Ratio Decidendi: The court's decision was influenced by the distinction between 'royalty' and 'technical services' as defined in Article VI and Article VII of the DTAA. It emphasized the need to differentiate and tax the consideration appropriately based on the activities performed and the nature of the payments.
Final Decision: The court partly answered the questions of law in favor of the appellant-Revenue, but did not disturb the figures/income which had been held to be not taxable based on the reasons stated in the judgment. The appeals were disposed of with no costs.
Sanjiv Khanna, J.
1. The present appeals by the Revenue under Section 260A of the Income Tax Act, 1961 (‘Act’, for short) pertain to Assessment Years 1989-90 and 1990-91 and stand admitted for adjudication on the following substantial questions of law:-
ITA No. 80/2001
“Whether the Tribunal was correct in law in holding that a sum of Rs.41,61,083/- received by the assessee in terms of Article 4.1 of the technical assistance agreement dated 23 May 1986 was in the nature of royalty?”
ITA No. 79/2001
“Whether the Tribunal was correct in law in holding that a sum of Rs.30,07,889/- received by the assessee in terms of Article 4.1 of the technical assistance agreement dated 23 May 1986 was in the nature of royalty?”
2. Answer to the aforesaid questions centres on Articles VI and VII of the Double Taxation Avoidance Agreement (DTAA) between India and Austria dated 24th September, 1963 and notified on 5th April, 1965. The said Articles are reproduced below:-
“ARTICLE VI
1. Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory.
2. In this article, the term “royalty” means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs, plans, secret processes or formulae, trade marks and other like property or rights.
ARTICLE VII
Amounts paid by an enterprise of one of the territories for technical services furnished by an enterprise of the other territory shall not be subject to tax by the first-mentioned territory except insofar as such amounts are attributable to activities actually performed in the first-mentioned territory. In computing the income so subject to tax, there shall be allowed as deductions the expenses incurred in the first-mentioned territory in connection with the activities performed in that territory.”
3. Articles VI and VII delineate that a perspicuous distinction was endorsed and accepted by India and Austria between ‘royalty’ paid as consideration for right to use copyrights, artistic or scientific works, designs, secret processes etc.; and consideration paid for ‘technical services’. The difference between the two Articles has been elucidated below. However, at this stage, we notice that ‘royalty’ derived by a non-resident as per Article VI, could be subjected to tax in India if received from sources in India and vice versa. Article VI incorporated the source rule for taxation. On the other hand, under Article VII, ‘technical services’ furnished by a non-resident enterprise, was not taxable in the country of source, except insofar as such amounts were attributable to the activities actually performed in the country of source. In such cases, income could be subjected to tax after allowing deduction of expenses in the country of source in connection with activities performed in the source country.
4. However, before we go into detailed discussion on the core aspect and draw a distinction between ‘royalty’ under Article VI and ‘technical services’ under Article VII, we would first like to refer to the relevant facts in brief.
5. The respondent-assessee, a company incorporated and resident of Austria had entered into ‘Technical Assistance Agreement for Small Hydro Power Plants’ (‘Agreement’, in short), dated 23rd May, 1986, with Punjab Power Generation Machines Limited (PPGML). Austria, therefore, was the country of residence and India, the country of source.
6. The respondent-assessee as per recitals in the said Agreement was custodian of advance and valuable technology for producing hydro power equipment on the basis of information gathered, researched and developed over years. The respondent-assessee had agreed to furnish to PPGML, know-how and technical assistance for manufacture of such equipment and marketing the same on the terms and conditions set out therein. The information to be made available was set out in
