Heubach Colour Pvt.Ltd.,, Baroda vs Department Of Income Tax

अपीलाथȸ कȧ ओर से /By Appellant : Shri Subhash Bains, CIT D.R. ू×यथȸ कȧ ओर से/By Respondent : Shri Milin Mehta, A.R. सुनवाई कȧ तारȣख/Date of Hearing : 07.01.2015 घोषणा कȧ तारȣख/Date of Pronouncement : 23.01.2015 I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 2

ORDER

PER SHAILENDRA KUMAR YADAV, J.M:

This appeal has been filed by the Revenue against the order of Commissioner of Income Tax (Appeals), Gandhinagar, dated 19.12.2012 for A.Y. 2006-07 on the following grounds:

"I) The Ld. CIT(A) has erred in law and on facts in holding that the purchase of technical knowhow cannot be taxed as Royalty and provisions of Section 195 of the Act are not applicable.

II) The Ld. CIT(A) has erred in law and on facts in holding that the payments on transfer of technical knowhow to be not in the nature of royalty in spite of the express provisions of Section 9(1)(vi) of the I.T. Act."

2. Assessee is a company limited by shares and carrying on the business in India since last several years. Assessee is assessed to tax with Additional Commissioner of Income Tax, Bharuch Range, Bharuch. Assessee is in business of manufacturing and sale of colour pigments and fine chemicals. During the year A.Y. 2007-08, assessee had acquired Avecia Business from Colour Ltd. (hereinafter referred as "CL"). Assessee paid following amounts to CL claimed to be for the intangibles, trademarks and goodwill transferred to the assessee company as under:

Date of Agreement Type of Asset Amount US $ Amount INR 31-3-2007 Goodwill 13,00,000 5,64,20,000 31-3-2007 Trademark 42,50,000 18,44,50,000 I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 3

31-3-2007 Technical 85,00,000 36,89,00,000 Know-how Total 1,40,50,000 60,97,70,000

The stand of assessee before Assessing Officer was that payment is for outright purchase of capital assets being intangibles in the form of goodwill, trademark and technical know-how. However, Assessing Officer was of the view that payment is covered by section 9(l)(vi) of Income Tax Act, 1961 and therefore assessee was required to deduct tax treating the payment as Royalty. It was therefore treated assessee in default for its failure to do so.

3. Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) granted relief to assessee by accepting its contention, whereby it was held that purchase of technical knowhow cannot be held as royalty and provision of 195 of the Act is not technical.

4. Same has been opposed before us on behalf of Revenue inter alia submitted that CIT(A) was not justified in holding that purchase of technical knowhow cannot be held as royalty and provision of 195 of the Act are not applicable. Ld. Departmental Representative further argued that CIT(A) was not justified in holding that payment and transfer of technical knowhow to be not in nature of royalty in spite of expression of provision of section 9(l)(vi) of the Act. On other hand, ld. Authorized Representative supported the order of CIT(A) and submitted that I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 4

CIT(A) was justified in holding that payment and transfer of technical knowhow to be not in nature of royalty. Accordingly, same should be upheld.

5. After going through rival submissions and material on record, we find that it is undisputed that payment made to M/s. Colour Limited was not taxable in India because of DTAA. Its case is that the transactions are not for royalty as defined in section 9(l)(vi) of the Act. Complete reading of the agreements and clauses there under reveal that assessee had purchased goodwill, trademark and technical knowhow from Colour Ltd, outright. M/s. Colour Limited ("seller") was the owner of manufacturing processes, formulae, trade secrets, technology, analytical techniques, testing procedures, processes and all documents and literature pertaining to the manufacturing. The knowhow relating to the business was purchased by assessee vide agreement dated 31-3-2007. The Seller had sold, assigned, conveyed and transferred to assessee its entire right, title, interest and ownership in the asset. It was accordingly agreed that pursuant to effective date, the seller shall cease to have right, title, interest and ownership in the asset. Similarly assessee would have right title, interest and ownership in the asset. We find the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co Ltd v. DIT [2011] 332 ITR 340 (Del) has held as under:

"55. Keeping in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of term 'royalty' appearing in Explanation 2 to sub-clause (vi) of section 9(1) of the Act. Sub-clause (i) I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 5

deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this sub-clause envisages is the transfer of "rights in respect of property" and not transfer of "right in the property". The two transfers are distinct and have different legal effects. In first category, the rights are purchased which enable use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadeshi Ranjan Sinha v. Hardev Banerjee AIR 1992 SC 1590. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case, the transferee does not have the rights which are indeterminate in duration and residuary in character. Lump sum consideration is not decisive of the matter. That sum may be agreed for the transfer of one right, two rights and so on all the rights but not the ownership. Thus, the definition of term 'royalty' in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset, In case of royalty, the ownership on the property or right remains with owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary."

5.1 On the similar lines, Hon'ble Calcutta High Court has held in case of CIT vs. Davy Ashmore India, (1991) 190 ITR 626 (Cal.), wherein the non-resident company did not retain any property in the designs and drawings, and the designs and drawings had I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 6

been imported under India's import policy after obtaining the prior approval of Reserve Bank of India. A royalty payment must be in respect of a right to use designs and drawings, and not for the purchase thereof. There is no allegation even that some rights in these properties were retained by nonresident. The income is not taxable as royalty u/s. 9 (l)(vi) of the Act, 1961. As remittance made were held not chargeable to tax in India. In such situation, provisions of Section 195 are not applicable. Hon'ble Supreme Court in case of GE India Technology Centre P. Ltd vs. CIT & Another (2010) 327 ITR 456 (SC) held that u/s. 195 payer is bound to deduct tax only if the sum payable is assessable to tax in India. Once provisions of Section 195 of the Act are not applicable and there is no question of recovery of tax in accordance with provisions of Section 201 of the Act.

5.2 This view is verified by the decision of Pune 'B' Bench in ITA No. 2040/PN/2012 for A.Y. 2010-11 in Deepak Fertilizers and Petrochemicals Corporation Limited vs. DDIT (International Tax)- I, Pune, wherein Tribunal held as under:

"5. Before us Learned Authorized Representative of assessee submitted that CIT(A) erred in holding that an amount of € 2,10,000 remitted to GPN, France towards part of total lump sum price of € 3,00,000 on net of tax basis for acquisition of process design documentation called Basic Engineering Package on outright purchase basis for Ammonium Nitrate Prill production pursuant to agreement entered into with GPN, France, fee for technical services therefore liable to withholding tax in India. It was prayed that assessee be declared to be not liable to make such deduction of tax on such amount of remittance and tax paid by it directed to be refunded to it. In this regard, assessee drew attention to various articles of agreement discussed I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 7

above. Learned Authorized Representative of assessee also drew our attention to the order of ITAT, Pune "A" Bench in case of ITO Vs. M/s. Royle Extrusion Systems Ltd. in ITA No.591/PN/94 and others, wherein vide para 3, the Tribunal in its facts and circumstances dismissed the revenue's appeal by observing as under:

"10. We have considered the rival submissions carefully. The sum and substance of the dispute revolves around the liability of the assessee to deduct tax at source on remittance of US$ 120,000to foreign collaborator. As per the assessee, the stated remittance was in terms of a foreign collaboration agreement with foreign collaborator and the said consideration related to the supply of drawings, designs, and detailed engineering services for erection of plant for manufacture of licensed products. The Income-tax officer, TDS-2 Pune, however, considered the same as in the nature of royalty/technical fees and also observed that assessee's plea that "payment relates to the acquisition of technical know how for the purchase of machinery is not correct-----". On the contrary, the Commissioner of Income-tax (Appeals) has accepted the plea of the assessee. We have also perused the technical-cum-financial collaboration agreement dated 23.12.1991 and the supplementary agreements dated 8.4.1992 and 9.4.1992 and find that the stated remittance is part of a consideration for supply of technical know how for erection of plant for manufacture of licensed products by way of supply of drawings, designs, and detailed engineering services, as being contended by the assessee. Factually speaking, we find no support or material to affirm the stand of the Assessing Officer that the payment does not relate to the acquisition of technical know-how for erection of plant/machinery.

11. Before us, the learned Departmental Representative has pointed out that the break up of the total consideration of US$ 360,000 stated in the initial agreement dated 23.12.1991 has been segregated in the supplementary agreement merely to I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 8

take the benefit of a judgment of the Hon'ble Supreme Court in the case of Scientific Engineering House P. Ltd. (supra). The assessee had pleaded that the impugned portion of the consideration is for the supply of drawings, deigns and detailed engineering services for the erection of the "plant" for the manufacture of the licensed products and, therefore, the same constitutes a 'plant' and in terms thereof no income accrues in India to the foreign collaborator. The learned Departmental Representative contended that in order to avail such benefit, the consideration has been bifurcated in the supplementary agreement. We find that all the three agreements, namely, the initial agreement dated 23.12.1991 and the supplementary agreements dated 8.4.1992 and 9.4.1992 were subject matter of examination by the Income-tax Officer as well as the Commissioner of Income-tax (Appeals], No such allegation, as is being made out by the learned Departmental Representative, is found in any of the orders of the authorities below. The learned Departmental Representative has not referred to any incriminating material or evidence to demonstrate that the bifurcation made out in the supplementary agreements was with any mala fide intentions. In view of the aforesaid and considering that the plea of the learned Departmental Representative is based on mere bald assertion, we do not find any merit in his plea and thus find no reasons to remit the matter back to the Commissioner of Income-tax (Appeals) for adjudication afresh."

6. Nothing contrary was brought to our knowledge on behalf of revenue with regard to decision of M/s. Royle Extrusion Systems Ltd, (supra). Facts being similar, so following same reasoning we hold that CIT(A) was not justified in holding that an amount of € 2,10,000 remitted to GPN Engineering and Process, France as part of total lump sum price of € 3,00,000 on net of tax basis for acquisition of process, design, documentation called Basic Engineering Package on outright purchase basis for Ammonium Nitrate Prill production pursuant to agreement entered into with GPN France was fee for technical service, I.T.A. No. 489/Ahd/13 A.Y. 07-08 [I.T.O.(Inte rnational Taxation vs. M/s. Heubach Colour Pvt. Ltd.] Page 9

therefore, liable to withhold tax in India. In view of above, we hold that assessee is not liable to make such payment on such deduction of tax on said amount of remittance. Assessing Officer is directed accordingly. As a result, appeal filed by assessee is allowed as indicated above."

6. Even before us nothing contrary was brought to our knowledge on these legal propositions. In view of above discussion, we are not inclined to interfere in the finding of CIT(A) who has held that purchase of technical knowhow cannot be taxed as royalty and provisions of Section 195 are not applicable. Same is upheld.

7. In the result, appeal filed by Revenue is dismissed.

Pronounced in the open Court on this the 23rd day of January, 2015.

Sd/- Sd/- (N. S. SAINI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER True Copy S.K.SINHA

आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-

1. राजःव / Revenue

2. आवेदक / Assessee

3. संबंिधत आयकर आयुƠ / Concerned CIT

4. आयकर आयुƠ- अपील / CIT (A)

5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड[ फाइल / Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।