Commissioner of Income Tax vs Reiter Ingolsteadt Spinnereimaschinenbau AG

P.D. Dinakaran J.

1 The above tax case appeals are directed against the order of the Income Tax Appellate Tribunal in I. T. A. Nos. 72/Mds/99 and 1930/Mds/98,

dated March 18, 2005.

2 The Revenue is the appellant. The assessment years involved are 1993-94 and 1994-95. The case of the appellant is that the

assessee/respondent herein is a foreign company represented by M/s. Lakshmi Machine Works Limited. The assessee filed a return of income on

December 16, 1993, offering technical know-how fees of Rs. 37,97,980 for the assessment year 1993-94 and on November 29,1994, admitting

its income at Rs. 1,14,43,800 for the assessment year 1994-95. As per the collaboration agreement entered into between the two companies,

relating to manufacture of high speed draw frames, namely, RSB 851, down payments were made in three instalments. Though there is no dispute

regarding the quantum of income chargeable to tax, the only dispute raised is regarding the rate of tax applicable.

The contention of the assessee is that these down payments are in the nature of technical know-how fees and therefore, to be taxed at 20 per

cent. This was not accepted by the Assessing Officer, who has stated that the down payments are in the nature of lump sum payment attracting

Section 9(1)(vi) of the Act, wherein it is stated that the lump sum payments are to be treated as royalty and therefore, to be taxed at 30 per cent,

and not at 20 per cent, as claimed by the assessee and accordingly, demanded Rs. 5,31,580 and Rs. 11,44,380 for the assessment years 1993-

94 and 1994-95 respectively.

Aggrieved by the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals). For the assessment year 1993-94, the

Commissioner of Income Tax (Appeals) allowed the appeal by following his own order in the assessee''s own case held in I. T. A. No. 409-C/97-

98 dated August 31, 1998. For the assessment year 1994-95, the Commissioner of Income Tax (Appeals) allowed the appeal by elaborately

discussing the Double Taxation Avoidance Agreement as well as the exchange of Notes and held that since the technical services were rendered

outside India, the present payments, whether termed as royalties or fees for technical services will be taxed at 20 per cent, of the gross amount of

the payments. The said findings of the Commissioner of Income Tax (Appeals) were also confirmed by the Income Tax Appellate Tribunal, on

appeals by the Revenue.

Aggrieved by the same, the Revenue has preferred these appeals raising the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the lump sum payment made to the

assessee foreign company was taxable at the rate of 20 per cent, relying on the exchange of notes of 1984 and not considering the terms of the

Double Taxation Avoidance Agreement with Germany and especially, Articles 12(3) and 12(4) of the said Agreement and the definition of

''royalty'' under the Income Tax Act ?

We have heard learned Counsel appearing for the Revenue.

On a perusal of the order of the Commissioner of Income Tax (Appeals) as well as the Tribunal, it is seen that both the Commissioner of

Income Tax (Appeals) as well as the Tribunal concurrently found that the agreement executed by the German company clearly shows that what

was received by the assessee is a fee for technical know how.

Both the authorities have also found that wherever there is a Double Taxation Avoidance Agreement, the definition contained in those Articles

should prevail over the definition under the Income Tax Act, 1961, in respect of ""royalties"" and ""fees for technical services"". They have also

referred to para. 5 of the exchange of notes between the Government of Federal Republic of Germany and the Government of India published in

[1985] 156 ITR 102 which reads as follows:

It is understood that the taxation of royalty income as consists of lump sum consideration for the transfer outside India of, or the imparting of

information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret

formula or process or trade mark, or similar property, shall not exceed 20 per cent, of the gross amount of such payments.

Applying the above exchange of notes as well as the provisions of the Double Taxation Avoidance Agreement, the Commissioner of Income

Tax (Appeals) and the Tribunal have held that the gross receipts by the assessee, whether termed as royalties or fees for technical services, should

be taxed at 20 per cent.

In the case of Commissioner of Income Tax Vs. P.V.A.L. Kulandagan Chettiar (dead) through L.Rs., , the apex court has held as follows

(headnote):

... in view of the Double Taxation Avoidance Agreement between India and Malaysia, the business income of the assessee from the rubber

plantations could not be taxed in India because of closer economic relations between the assessee and Malaysia in which the property was located

and where the permanent establishment had been set up.

this Court in the case of Commissioner of Income Tax Vs. Barmag AG, West Germany, , in which one of us was a party (P. D. Dinakaran J.)

taking note of the factual finding that the entire payment received by the foreign company as per Article 12.1 of the agreement constituted technical

know-how fees only and taxable at the rate of 20 per cent, as per the Double Taxation Avoidance Agreement, held that the appellant therein was

aggrieved only with regard to the factual findings rendered by the appellate authorities and, therefore, there was no substantial question of law

involved.

Applying the above ratio, since the case in hand is arising in the identical facts and circumstances, holding that the appellant is aggrieved by the

factual finding rendered by the appellate authorities, we are of the considered opinion that no substantial question of law arises in this matter.

Hence, the appeals are dismissed. Consequently, T. C. M. P. No. 1267 of 2005 is also dismissed.