Atlas Copco AB of Sweden vs Commissioner of Income Tax

At the instance of the applicant-assessee, the Tribunal has referred the following questions of law under s. 256(1) of the IT Act, 1961, for the opinion of this Court:

(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the lump sum consideration of US$ 1,20,000 was not a capital receipt in the hands of the assessee company?

(2) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the lump sum consideration was royalty within the meaning of Art. 7 of the DTAA between India and Sweden as well as s. 9 of the IT Act, 1961?

The assessment year involved herein is asst. yr. 1986-87. The assessee is a non-resident Swedish company. The assessee had entered into an agreement with Atlas Copco (India) Ltd. on 25th March, 1985 for supply of the technical know-how for the manufacture of screw type air compressors and to render technical assistance that may be required in the said manufacture during the existence of the agreement against the lump sum consideration of US$ 1,80,000 payable in three instalments.

It was contended by the assessee that the amount received during the year pursuant to the aforesaid agreement was not taxable in India as per the provisions of the DTAA. The AO rejected the contention of the assessee and held that the amount received by the assessee was royalty covered under Art. 7 of the DTAA and therefore, taxable in India. The said order was confirmed by the CIT(A) as also the Tribunal. On a reference application filed by the assessee, the Tribunal has referred the aforesaid questions for the opinion of this Court.

On perusal of the order of Tribunal, particularly para 8 thereof, it is seen that the Tribunal has considered the various clauses in the agreement dt. 25th March, 1985 and recorded a finding as follows :

In order to decide whether receipt in question is capital or not the relevant terms of the agreement dt. 25th March, 1985 have to be considered. The preamble of the agreement states that the assessee company which had accumulated valuable technical know-how in the manufacture of screw type compressors out of its expertise and research work carried out by it, had agreed to supply and impart with the know-how to the Indian company as per the terms of the agreement. Clause 1(a) of the agreement defines the know-how which is the subject-matter. Clause 2 provides that assessee shall impart, disclose and supply the know-how which shall be delivered, imparted and disclosed and supplied from outside the Indian territory. Clause 4(a) stipulates that the assessee shall supply, impart and disclose, modifications, improvements and research in the know-how to the Indian company from time to time and vice versa. Clause 4(b) provides restrictions on the Indian company that it shall not manufacture or sell in the market any product which did not attain the standard or degree of quality prescribed by the assessee company. Clause 5(a) provides that the Indian company shall put the trademark of the assessee on all the items exported by it. Clause 5(b) provides that the Indian company can use the trademark in advertisements, brochures, displays and other marketing information but will have to mention that manufacture of the items has taken place under the license from Atlas Copco. Sub-cl. (c) of cl. 5 provides that the Indian company cannot use the trademark in combination with any other word, symbol, letter or illustration without written permission of the assessee. Sub-cl. (d) provides that all trademark rights in symbol, letter or illustration shall be the exclusive property of the assessee company in all the countries. Sub-cl. (e) provides that license granted to the Indian Company shall automatically expire on the termination of the agreement. Clause 19 provides that either party can terminate the agreement at any time by giving notice in writing on happening of certain events. Clause 6(a) provides the consideration for use of such know-how in lump sum at US$ 1,80,000 payable in three instalments, with which we are concerned in the present appeal. Clause 9, which is an important clause states that the Indian company shall not disclose the know-how to any other person and shall keep it as a secret. Clause 10 authorises the Indian company to disclose the know-how to other parties with the prior consent of the assessee and subject to the approval of the Indian Government. Clause 18 provides the period of agreement during which it shall remain in force. Clause 20(ii) again stipulates that the Indian company shall respect the secrecy provision of cl. (a) for an indefinite term. Clause 25 is an arbitration clause.

From the aforesaid findings recorded by the Tribunal, it is seen that under the agreement in question, the amounts were paid to the assessee on account of right to use the know-how for a specified period and there was no outright transfer of know-how by the assessee company to the Indian company. If the assessee retained all the rights in the know-how to itself and only the limited right to use the know-how was parted with under the agreement, then the amounts received thereunder would be nothing but royalty received for giving the right to use the know-how for the limited period.

Moreover, art. 7 of the DTAA between India and Sweden, relevant to the assessment year in question reads thus:

Article 7--Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory. 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, patents, models, designs, plans, secret processes or formulae, trademarks and other like property or rights, but does not include any royalty or other like amount in respect of the operation of mines, quarries or other natural resources, or in respect of the cinematographic films.

From the aforesaid article in the DTAA it is seen that any amount received by the assessee for allowing the right to use the know-how constitutes ''royalty'' and would be taxable in India. In the present case, the assessee has received the amount from an Indian company on account of the assessee permitting the Indian company to use its know-how for the period specified in the agreement. Therefore, the amount received by the assessee being ''royalty'' covered under art. 7 of the DTAA, the Tribunal was justified in holding that the amounts in question were taxable in India. In the result, the questions raised in the reference are answered in the affirmative i.e. in favour of the Revenue and against the assessee. The reference is accordingly disposed of with no order as to costs.