Case of Authority for Advance Rulings, October 28, 2009 (case International Tire Engineering Vs Director of Income Tax (International Taxation))
| President | P.V. Reddi, J. (Chairman) and J. Khosla, Member |
| Resolution Date | October 28, 2009 |
Judgment:
P.V. Reddi, J. (Chairman), (New Delhi)
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The applicant is a company incorporated in USA having its registered office at San Antonio, USA. The applicant is, inter alia, engaged in the business of supplying advance technology for the manufacture of radial tyres. Being approached by an Indian Company, namely, CEAT Limited, the applicant agreed to grant to the said company a perpetual irrevocable right to use the know-how as well as to transfer the ownership in tread and side-wall designs and patterns required for the manufacture of radial tyres for a lump sum consideration of US $ 7,10,220. The applicant states that the sale and transfer of technology know-how took place in USA and the documents were executed in USA. Technology transfer Agreement was executed on 4th September, 2008 between the applicant and CEAT Limited. The applicant further states that the know-how would be transferred by the applicant to CEAT Limited in the shape of technical documentation and designs which amount to 'plant' and the sale of such plant has been made in USA and no part of the consideration was received in India. The applicant therefore submits that the income is not liable to taxation in India either under Section 5(2) or Section 9(1)(i) of the Income-tax Act, 1961. Moreover, it is contended that Clause (vi) or (vii) of Section 9(1) dealing with 'royalty' and 'fees for technical services' have no application. The applicant relies on Clause (a) of para 5 of Article 12 of DTAA between India and USA in order to contend that the consideration received towards consultancy and assistance does not amount to 'fee for included services.' It is submitted that such services including deputation of technical personnel would take place next year after the machinery arrives.
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The applicant has formulated the following questions for seeking advance ruling:
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Whether on the stated facts in the "Technology Transfer Agreement dated 4th day of September, 2008 entered into between the applicant and M/s. CEAT Limited, and in law the consideration for the transfer of documentation amounting to US dollars 7,10,200 payable by M/s. CEAT Limited to the applicant is exigible to tax under the Income-tax Act, 1961, in the hands of the applicant.
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Whether on the stated facts and in law the consideration for consultancy and assistance receivable by the applicant from M/s. CEAT Limited in terms of para No. 7 & 8 of the aforesaid Agreement is taxable in the hands of the applicant in India under the Income-tax Act, 1961.
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If the answer to query No. 1 & 2 above is wholly or partly against the applicant, at what rate and on how much Remittance tax needs to be withheld under Section 195 of the Income Tax Act, 1961 for which the consideration is being remitted to the applicant?
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The learned Counsel for the applicant has pointed out that the transaction involves the sale of technical documentation viz. drawings and designs outside India (in USA) and the transfer of ownership in Tread and Sidewall designs. It is submitted that the know-how for the erection and commissioning of the plant and process for manufacturing of radial tyre is provided to the applicant under the Technology Transfer Agreement (hereinafter referred to as 'Agreement') and the same can be used by CEAT anywhere in the world, though the transfer of such technology is utilized initially in its factory being set up at Halol, Gujarat State. It is submitted that the technical document is a chattel or a plant which can be transferred and the sale transaction having taken place in America, the income accrues or arises in America but not in India. Certain decisions have been relied upon to contend that the consideration attributable to the offshore supplies cannot be subjected to Indian income-tax. It is also submitted that income is not in the nature of royalty or fees for technical/included services. In the absence of PE of the applicant in India, the income arising from the transfer of technology cannot be taxed as business profits in view of the provisions of Convention between the Government of United States of America and the Government of Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income (hereafter referred to as 'Treaty') between India and USA. Technical assistance rendered or training imparted is not liable to be taxed by reason of Article 12(5)(a) of the Treaty.
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The Revenue has taken the stand that the income received by the applicant is covered under para 3(a) and 4(b) of Article 12 of India-USA Treaty both as 'royalty' and 'fees for the Included Services' and therefore, the receipts are liable to be taxed in India irrespective of the existence or otherwise of PE. Alternatively, it is submitted that the applicant will have a service PE in India having regard to the activities contemplated to be undertaken in India under the Agreement for a period of more than 100 days. Therefore, the business profits attributable to the PE are taxable in India. Applicability of Article 12(5)(a) is disputed by the Revenue. The Revenue also disputes the proposition that the transaction under the Agreement tantamounts to sale of plant outside India and therefore, no income or deemed income accrues or arises in India.
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We shall now go through the relevant clauses in the agreement titled as "Technology Transfer Agreement" and note the salient features thereof.
5.1 First, we will notice the recitals in the Agreement. They refer to the fact that the transferee (CEAT Ltd.) is setting up a plant for the manufacture and sale of radial tyres for automotive vehicles, initially at Halol, Gujarat and the transferee is desirous of acquiring know-how and assistance for setting up the plant. Then it is stated that the transferor who is having requisite expertise and know-how for setting up of the plant, is willing to grant a perpetual, irrevocable right to use the know-how and also to transfer the ownership in Tread and Side- Wall design/pattern to the transferee for a lump sum consideration and on the terms set forth in the Agreement. It is stated in Clause 9.22 that all the know-how is legally and beneficially owned by the transferor.
5.2 We may notice some of the definitions in the Agreement.
"Know-how" or "Technology" means all technical information, patents, know-how, data, drawings, designs, computer software, Machines specifications, technical specifications, methodologies, test methods, layout and process data, raw material specifications, components and assembly data, to which the Transferor has right to transfer to the Transferee as provided under this Agreement including any improvements/modifications: (a) for the manufacture of the Products as specified in Annexure IA in the Plant; (b) for and deriving from the Basic Engineering of the Plant as identified in Annexure IIA; (c) for the installation, operation, maintenance, dismantling and repair of the Machines in the Plant, and for the Commissioning, Start-up, operation and maintenance of the Plant; (d) for the operation of the Process to manufacture the Products in the Plant as identified in this Agreement; (e) for the performance of the Supervision and Training Services; and (f) for design & development of the Products covered in Annexure IA and Products falling in the same category."
"Know-how Documentation" means the documentation with illustrations containing the Know-how and the Basic Engineering know-how which will be supplied by the transferor as detailed in Annexures IIA, IIB and IIC and any other documentation which may be required for the use of transferee.
"Plant" means the manufacturing plant including its test room, laboratories and R&D facility to be constructed in Halol, Gujarat by the assembly of 'machines' (all the mechanical and electrical equipment and apparatus required for the manufacture and testing of products) in accordance with the Know-how for the manufacture of products by using the manufacturing process described in Annexure IC.
5.3 Clause 2 speaks of "TRANSFER OF KNOW-HOW AND RIGHT TO USE". It says: "in consideration for the payment as herein for the Technology transfer... on and from the effective date, the transferor shall transfer and the transferee will acquire a non-exclusive, irrevocable, perpetual, royalty-free right to use...: (a) the know-how in the Plant and Facilities, (b) the know-how to manufacture and sell the products in the territory (i.e. anywhere in the world) and (c) to adopt the know-how contemplated in (a) above in products that the transferee may manufacture and/or design, develop at any other facility owned or controlled by the transferee. It is then clarified that save as provided in Clause 3, the transferor is not alienating the Intellectual Property Rights in the know-how. Clause 2.2 states that the transferee shall have the right to sell Products with no restriction and for this purpose, grant license to any affiliate-entity. In Clause 2.3, the transferor declares that it will not grant know-how and documentation or consultancy services contemplated under the Agreement, to any other person in India for the manufacture of products covered under the Agreement during the term of the Agreement.
5.4 The next Clause 3 provides for transfer of ownership of Tread and Sidewall design/patterns. It is better to extract the entire Clause (3).
The Tread and Sidewall Design/Patterns for the sizes referred to in the Annexure IA hereto, designed by the Transferor and approved by the Transferee as a part of delivery of Know-how Documentation and prepared by the Transferee in accordance with Annexure IID shall vest exclusively with the Transferee. The Parties hereby agree that the Transferee shall be entitled to have the Tread and Sidewall Design/Patten registered in the name of the Transferee with appropriate Governmental Authority. For avoidance of doubt, the mould drawings and Tread and Sidewall Design/Patterns...
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