Commissioner Of Income Tax, Rajahmundry v. $ The Andhra Petrochemicals Ltd., Agent Of M/S. Mavy Mckee(London) Ltd., Venkatarayapuram, Tanuku – 534

*HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE CHALLA KODANDA RAM +ITTA Nos. 144 OF 2002; 35 OF 2003 AND 479 OF 2012 % Dated 06-11-2014 Commissioner of Income Tax, Rajahmundry …Appellant VERSUS $ The Andhra Petrochemicals Ltd., agent of M/s. Mavy Mckee(London) Ltd., Venkatarayapuram, Tanuku – 534 215, WestGodavari District …..Respondent ! Counsel for the Appellant : Sri S.R. Ashok, SeniorCounsel ^Counsel for the Respondent: Sri Dastoor, Senior Counsel <GIST: >HEAD NOTE: ? Cases referred [1] (1968) 68 TTR 786 (MAD)2 (2000) 243 ITR 459 (Mad)3 (2011) 336 ITR 599 4 (1977) 109 ITR 158 (AP)5 (2003) 262 ITR 110 (AP)6 (2010) 329 ITR 4427 (2014) 48 TAXMANN.COM 67 (Bombay) THE HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAMITTA Nos. 144 OF 2002; 35 OF 2003 AND 479 OF 2012COMMON JUDGMENT: (per L. Narasimha Reddy, J) Theses appeals are filed by the Revenue under Section260A of the Income Tax Act, 1961 (for short, ‘the Act’) feelingaggrieved by the common order dated 11-04-2002 passed by theVisakhapatnam Bench of the Income Tax Appellate Tribunal (forshort, ‘the Tribunal’) in ITA No. 721/Hyd/1996 and batch, referableto the assessment year 1988-89. The subject matter of theappeals before the Tribunal was an order passed by the assessingofficer under Section 143(3) of the Act against the respondent bytreating it as an agent of M/s. Davy Mckee (London) Limited (forshort, ‘the foreign company’). Briefly stated, the facts are as under: The respondent is a company incorporated under the IndianCompanies Act, 1956 and is in the field of petro chemicals. Itentered into collaboration-cum-service agreements with the foreigncompany. Under the respective agreements, the foreign company was to supply and instal certain machinery and to transfer therelevant know-how. The total consideration was in the range ofOne Million US Dollars. The respondent was making payments tothe foreign company in foreign currency, by applying for noobjection certificate, referable to Rule 115 of the Income TaxRules (for short, ‘the Rules’). The respondent has been submitting its returns and payingincome tax regularly. The assessing officer intended to treat therespondent, as the agent of the foreign company, in terms ofSection 163 of the Act and to bring the payments made to theforeign company, under the purview of the income tax. A noticewas issued in this behalf, and on a consideration of the objectionsraised by the respondent, the assessing officer passed an orderdated 19-11-1990 under Section 163 (2) of the Act holding that therespondent is liable to be regarded and treated as the agent of theforeign company, for the assessment year 1988-89. Thereafter,he passed an order of assessment on 11-04-1991, with referenceto the payments made to the foreign company, by treating thesame as income. Similar order was passed for the assessmentyear 1989-90. As regards the assessment year 1992-93, theassessing officer refused to issue no objection certificate forremittance of the amount to the foreign company. Feeling aggrieved by the three orders referable to theassessment years mentioned above, the respondent filed AppealNos. 208, 209 and 205/1995-96 before the Commissioner ofIncome Tax (Appeals-V), Hyderabad. Through a common order dated 27-12-1995, the Commissioner partly allowed the appealsreferable to the assessment years 1988-89 and 1989-90 anddismissed the appeal pertaining to the assessment year 1992-93. The respondent filed ITA Nos.721 and 722/Hyd/1996 feelingaggrieved by the order passed by the Commissioner in respect ofthe assessment years 1988-89 and 1989-90, before the Tribunal. Through its order dated 11-04-2002, the Tribunal allowed theappeals holding that the amounts paid to the foreign countrycannot be treated as royalty and thereby cannot be taxed. Hencethese appeals are filed by raising the following questions of law: dated 27-12-1995, the Commissioner partly allowed the appealsreferable to the assessment years 1988-89 and 1989-90 anddismissed the appeal pertaining to the assessment year 1992-93. The respondent filed ITA Nos.721 and 722/Hyd/1996 feelingaggrieved by the order passed by the Commissioner in respect ofthe assessment years 1988-89 and 1989-90, before the Tribunal. Through its order dated 11-04-2002, the Tribunal allowed theappeals holding that the amounts paid to the foreign countrycannot be treated as royalty and thereby cannot be taxed. Hencethese appeals are filed by raising the following questions of law: 1.“Whether the Appellate Tribunal is justified in notholding that the amount received by the non-residentfor parting with drawing and designs and technicalknow-how constitute ‘royalty’ on the anvil of Sec.9(i)(vi)of the I.T. Act Double Taxation Avoidance Act?”holding that the amount received by the non-residentfor parting with drawing and designs and technicalknow-how constitute ‘royalty’ on the anvil of Sec.9(i)(vi)of the I.T. Act Double Taxation Avoidance Act?” 2.“Whether the Appellate Tribunal is justified in notholding that the payment received by the non-residentfor grant of ‘user’ right of drawings and designs andtechnical know-how constitutes royalty under theDTAA?”holding that the payment received by the non-residentfor grant of ‘user’ right of drawings and designs andtechnical know-how constitutes royalty under theDTAA?” 3.“Whether the Appellate Tribunal is justified in holdingthat the transaction in the hands of non-resident isliable to be treated as out right sale of plant and theprofit arising there from should be treated as businessprofit?”that the transaction in the hands of non-resident isliable to be treated as out right sale of plant and theprofit arising there from should be treated as businessprofit?” 4.“Whether the Appellate Tribunal is justified in holdingthat the agent of non-resident is not responsible fordischarge of statutory obligation anterior to grant ofrecognition of such agency?”that the agent of non-resident is not responsible fordischarge of statutory obligation anterior to grant ofrecognition of such agency?” 5.“Whether the Appellate Tribunal is justified in settingaside levy of interest U/s.139(8) of I.T. Act?”aside levy of interest U/s.139(8) of I.T. Act?” Sri S.R. Ashok, learned Senior Counsel for the appellant submits that the view taken by the Tribunal that the amountreceived by the foreign company cannot be treated as royalty, isopposed to Section 9(1) and other relevant provisions of the Act,and the Rules. He submits that a perusal of the agreementbetween the respondent and the foreign company discloses thatthere was a clear transfer of patent, secret formulae, technicalknow-how and thereby the consideration paid therefor answeredthe description of ‘royalty’. He submits that though the contractwas in several parts, it was only for the sake of convenience and,at least the amount that is paid for the transfer of know-how orpatents, ought to have been treated as royalty. He contends thatthe Tribunal has placed excessive liberal interpretation upon theDouble Tax Avoidance (DTA) Agreement entered into betweenIndia and the United Kingdom and treated the transaction betweenthe respondent and the foreign company, as covered by thesame. Learned Senior Counsel submits that since the agreementhas provided for restriction of usage of patent or other know-how,totally different legal consequences flow and thereby, theagreement stands taken away from the regime under Section 90 ofthe Act. He has taken us through the relevant provisions of law,the text of agreement between the respondent and the foreigncompany, the relevant clauses of DTA Agreement and certainprecedents. Sri Dastoor, learned Senior Counsel for the respondent,submits that the amount paid to the foreign company was nothingbut the consideration for the part of a comprehensive contract,which involves supply of machinery, erection and transfer of Sri Dastoor, learned Senior Counsel for the respondent,submits that the amount paid to the foreign company was nothingbut the consideration for the part of a comprehensive contract,which involves supply of machinery, erection and transfer of know-how, which was for a limited purpose. He submits that theentire agreement is covered by the regime under the DTA, andthere was absolutely no basis for the assessing officer to levyincome tax on the component of the alleged royalty. He submitsthat even where a foreign agency is otherwise liable to pay taxunder the Act, different considerations altogether ensue, in casethe contract is governed by a DTA, treaty or arrangement. He hasplaced reliance upon several precedents, including those in M.V.S.Kathirvelu Nadar vs. Commissioner of Agricultural IncomeTax[[1]],Commissioner of Income Tax vs. Nayveli LigniteCorporation Ltd[[2]], both rendered by the Madras High Court;Commissioner of Income Tax vs. D.C.M. Ltd[[3]], rendered by theDelhi High Court, Commissioner of Income Tax vs. HindustanShipyard Ltd[[4]],Commissioner of Income Tax vs. SundwigerEMFG & Co.[[5]], both rendered by this Court, Commissioner ofIncome Tax vs. Maggronic Devices (P) Ltd.[[6]]of the HimachalPradesh High Court, Director of Income-Tax v. HaldorTopsoe[[7]]and some other decisions. The basic facts are not in dispute. The respondent enteredinto an agreement with a foreign company for supply andinstallation of sophisticated items of machinery required in itsplant. The agreement has also provided for the transfer of know-how needed for it. After the agreement was entered into,remittances in foreign exchange were made for two assessment years i.e., 1988-89 and 1989-90, after obtaining the certificateunder Rule 115 of the Rules. Some amount was to be paid for thethird consecutive year. As required under law, an application wasmade for grant of certificate. At that stage, the assessing officerthought of bringing the amount paid or payable to the foreigncompany under the purview of the tax. As a first step, he passedan order under Section 163 of the Act treating the respondent asthe agent of the foreign company. That order, by itself does notresult in any prejudice to the respondent. It is only when an orderof assessment is passed against it, in its capacity as agent, thatthe grievance is felt. With reference to the two assessment years,separate orders under Section 143(3) of the Act were passedimposing the tax liability vis-à-vis the amounts that were paid tothe foreign company. For the assessment year, 1992-93, thepermission for remittance was denied. The respondent pleaded that what it made through theagreement with the foreign company is an outright purchase andno royalty whatever was paid. The assessing officer however tookthe view that a substantial amount of consideration is towardsroyalty for transferring the patent and other technical know-howand that the same is liable to tax. The arrangement between therespondent and the foreign company is covered by separateagreements, namely, (a) licence know-how and engineeringagreement, (b) supply of equipment and materials agreement and(c) services agreement. The scope of the first agreement is speltout in the preamble, which reads: “(A) APL intends to install an Oxo Alcholols plant at Vizag in the Republic of India for the production of 2-ethylhexanol and butanols. (B) APL intends to appoint Davy Powergas IndiaPrivate Limited (or another Indian Contractor acceptableto both DML and APL) to render certain services inconnection with the engineering, procurement ofequipment, supervision of erection, start-up andcommissioning of the said plant. (C) DML has right in certain processes ashereinafter defined and has patent and licensing rightsand confidential technical and commercial informationand confidential know-how in relation to such processes. “(A) APL intends to install an Oxo Alcholols plant at Vizag in the Republic of India for the production of 2-ethylhexanol and butanols. (B) APL intends to appoint Davy Powergas IndiaPrivate Limited (or another Indian Contractor acceptableto both DML and APL) to render certain services inconnection with the engineering, procurement ofequipment, supervision of erection, start-up andcommissioning of the said plant. (C) DML has right in certain processes ashereinafter defined and has patent and licensing rightsand confidential technical and commercial informationand confidential know-how in relation to such processes. (D) In consideration of the mutual covenantshereinafter set forth DML and APL have agreed that DMLshall grant and APL shall accept certain rights in certainprocesses as hereinafter more particularly defined, andDML shall supply to APL know-how and front-endengineering package for the said plant.” Clauses (A) and (B) are almost common for the other twoagreements. Clause (C) of the other two agreements reads” “DML and APL have entered into an Agreement(hereinafter called “the Licence, Know-How andEngineering Agreement”) dated the 30[th] day of October1986, whereby DML undertakes to supply know-how,licence and front-end engineering package for thedesign, erection and operation of the said Plant andguarantees its performance on the terms thereinappearing.” Clauses (D) and (E) of the supply of equipment and materialagreements read: “(D) Certain critical/complex items of equipmentof a proprietary nature which are required for said Plantare not readily/satisfactorily available in India. Suchitems must be properly designed and fabricated to ensure safe and reliable operation of the said Plant. (E) DML is able to supply such items fromsources outside India and is willing to do so for theconsideration and upon the terms and conditionshereinafter stipulated.” Clause (D) of the service agreement reads: “DML is prepared to assign an agreed number ofits personnel to provide specialist advice on the detailengineering work to be carried out in India and on theerection, start-up and commissioning of the said plant onsite for the consideration and upon the terms andconditions hereinafter stipulated.” There is not much controversy about the supply ofequipment and materials agreement. The dispute is only inrelation to licence know-how and engineering agreement. TheRevenue laid much emphasis on Clauses 6 and 8; which read asunder: “6. DML’s KNOW-HOW means up to datetechnical information and know-how relevant to thePLANT and within the scope of the DAVY PROCESSand within the control of DML at the date of thisAgreement including, but not limited to, designs, datafrom process developments and experiments, processdata, manufacturing data, drawings, specifications,procedures, flowsheets, construction and operationtechniques, the composition, nature, properties and useof the catalyst used in the DAVY PROCESS (but notinformation and know-how relating to the manufacture,recovery or refining of rhodium containing materials) andother useful technical information and know-how,relevant to the PLANT. 8. DML’s IMPROVEMENTS means technicalinformation and know-how relevant to the PLANTrelating to and within the scope of the DAVY PROCESS “6. DML’s KNOW-HOW means up to datetechnical information and know-how relevant to thePLANT and within the scope of the DAVY PROCESSand within the control of DML at the date of thisAgreement including, but not limited to, designs, datafrom process developments and experiments, processdata, manufacturing data, drawings, specifications,procedures, flowsheets, construction and operationtechniques, the composition, nature, properties and useof the catalyst used in the DAVY PROCESS (but notinformation and know-how relating to the manufacture,recovery or refining of rhodium containing materials) andother useful technical information and know-how,relevant to the PLANT. 8. DML’s IMPROVEMENTS means technicalinformation and know-how relevant to the PLANTrelating to and within the scope of the DAVY PROCESS and coming within the control of DML after the date ofthis Agreement, including, but not limited to, designs,data from process developments and experiments,process data, manufacturing data, drawings,specifications, procedures, flowsheets, construction andoperating techniques, the composition, nature, propertiesand use of the catalyst used in the DAVY PROCESS(but not information and know-how relating to themanufacture, recovery or refining of rhodium-containingmaterials nor to information and know-how relating toproduction of synthesis gas) and other useful technicalinformation and know-how and improvements theretoand patents granted and patent applications filed inIndia, thereon, which have been used in the commercialpractice of the DAVY PROCESS, and which are relevantto the PLANT.” The respondent took shelter under the portion “but notinformation and know-how relating to the manufacture, recovery orrefining rhodium-containing materials nor to information and know-how relating to production of synthesis gas”; and pleaded that theknow-how was for the limited purpose of erection and installationof the machinery and not in absolute terms. It has also placedemphasis upon the following sub-clauses: “(a) Non-resident granting licences for using DMLprocess with specific condition against sub-licensing,assigning, mortgaging etc., without written consent ofnon-resident; (b) Licence is non-exclusive and the APCL has notacquired any exclusive right over the patent of it; (c) DML was free to supply and grant licences over the same technical know-how and patent through out theworld;world; (d) DML has not transferred technical know-how andpatent rights as part of different trade sales transaction toAPCL; and (e) Confidential clause restraining APCL from divulgingwhat was parted by the non-resident.” The discussion in this behalf is required to commence fromthe stage of taking note of the purport of Section 9 of the Act. Thesection deals with the amounts paid to the agency outside Indiawhich in turn is deemed to be an income accruing or arising withinIndia. The circumstances under which such a presumption can bedrawn are enlisted in the section. One of the items covered by Section 9 of the Act is royalty. Section 9(1)(vI) reads: “(1) The following incomes shall be deemed to accrue orarise in India- ………. (vi)income by way of royalty payable by- (a)the Government; or (b)a person who is a resident, except where the royaltyis payable in respect of any right, property or informationused or services utilised for the purposes of a businessor profession carried on by such person outside India orfor the purposes of making or earning any income fromany source outside India; or (c)a person who is a non- resident, where the royalty ispayable in respect of any right, property or informationused or services utilised for the purposes of a businessor profession carried on by such person in India or for thepurposes of making or earning any income from anysource in India.” The proviso and remaining part of the section deals with theother details as well as exemptions. It is not in dispute that theamount paid to the foreign company is otherwise taxable underSection 9. (b)a person who is a resident, except where the royaltyis payable in respect of any right, property or informationused or services utilised for the purposes of a businessor profession carried on by such person outside India orfor the purposes of making or earning any income fromany source outside India; or (c)a person who is a non- resident, where the royalty ispayable in respect of any right, property or informationused or services utilised for the purposes of a businessor profession carried on by such person in India or for thepurposes of making or earning any income from anysource in India.” The proviso and remaining part of the section deals with theother details as well as exemptions. It is not in dispute that theamount paid to the foreign company is otherwise taxable underSection 9. The basis for the respondent to plead that the amount paid by it to the foreign company is not royalty is that (a) it is paid inlumpsum and not year after year for the use of patent or anyfacility; (b) the transfer of technical know-how or patent was forthe limited purpose of installation and fixing the machinery and (c)that the arrangement is covered by the DTA Agreement. This pleadid not weigh with the assessing officer as well as theCommissioner. The Tribunal however accepted that. Royalty, by its very nature is a sum payable to the owner ofa design, invention or trade mark by another for using it. It isclearly opposed to an outright transfer. The original patent or thefacility of other description continues to remain with the owner andthe user would be permitted to avail the facility in a limited orabsolute manner on payment of royalty. On cessation of thearrangement, the user loses the right and the owner of the facilitygets full and absolute control over it. A note of caution need to beadded here. Through the royalty is required to be paid periodicallyduring the subsistence of the arrangement, it is quite possible forthe parties to agree for payment of a lumpsum. However, alumpsum payment would answer the description of royalty, if onlyit is referable to a fixed period for which the facility can beutilised. A lumpsum payment, without mentioning the period isprone to take away such amount from the definition of royalty. In the Law Lexicon by Sri P. Ramanatha Aiyar the followingmeaning is ascribed to the word royalty. “ROYALTY. Has several meanings: (1) percentagesor dues payable to landowners for mining rights; (2)sums paid for the use of a patent; (3) percentages paid to an author by a publisher on the sales of a book. OTHER DEFINITIONS: A royalty is a tax or duty paidto the owner of a patent for the privilege ofmanufacturing or using the patented article; Royalty is a tax or duty paid to the owner of a patentfor the privilege of manufacturing or using thepatended article; something proportionate to the useof a patented device, in other words, a kind ofexercise, specific sums paid annually, or at otherstated periods, for the right to use a patented device,whether it is used much or little or not at all.“Royalty” is the most appropriate word to apply torental based on the quantity of coal or other mineralthat is or may be taken from a mine.” In Corpus Juris II, royalty is defined as under: “Royalty or Royalties. A. As Noun. In its primaryand natural sense, merely the English translation orequivalent of “regalitates,” “jura regalia,” “jura regia.” Formerly the word referred to the prerogative of the king totake gold and silver discovered in land privately owned. In Corpus Juris II, royalty is defined as under: “Royalty or Royalties. A. As Noun. In its primaryand natural sense, merely the English translation orequivalent of “regalitates,” “jura regalia,” “jura regia.” Formerly the word referred to the prerogative of the king totake gold and silver discovered in land privately owned. In case of copyrights and patents the term iscommonly used to designate the share of the proceeds ofproperty paid to a person having some proprietary orcreative interest therein by another who has obtained fromthe payee an absolute or qualified ownership of suchproperty. It has been defined as a tax or duty paid to theowner of a patent for the privilege of manufacturing or asingthe patented article; rental; something proportionate to theuse of a patented device; in other words, a kind of exercise;specific sums paid annually, or at others stated periods, forthe right to use a patented device, whether it is used muchor little or not at all. The word has been held an appropriateterm as applied to improvements which are nonpatentable. In oil and gas leases, a share of the product or profitreserved by the owner for permitting another to use theproperty; the amount reserved or the rental to be paid to the original owner of the whole estate; the compensation for theprivilege or rights created by the lease; the compensationprovided for the privilege of drilling for oil and gas, andconsists of a share in the oil and gas produced underexisting leases; the share of the product or profit paid to theowner of the property. As applied to an existing lease, ashare in the oil and gas produced, but the term does notinclude a perpetual interest in the oil and gas in the ground.” If these tests are applied to the amount that is paid by therespondent to the foreign company, it becomes difficult to treat itas royalty. Firstly, the amount is paid in lumpsum and it is notreferable to any particular period. Secondly, though there is apossibility to interpret the clauses in such a way that, (a)the foreign company retained with it theultimate patent but permitted the respondent in arelated manner, that too by prohibiting the sub-lease or other unauthorised uses, thereby bringingthe act nearer to the one of the royalty, andultimate patent but permitted the respondent in arelated manner, that too by prohibiting the sub-lease or other unauthorised uses, thereby bringingthe act nearer to the one of the royalty, and (b) the transfer was not on payment of anyperiodical royalty, but was only to the extentwhich is necessary for installation and therebytreating it as a concomitant part of thecomprehensive agreement;which is necessary for installation and therebytreating it as a concomitant part of thecomprehensive agreement; the predominant factors are suggestive of the fact that theconsideration paid by the respondent, even under the licenceknow-how, and engineering agreement or against the DTAAgreement being treated not as royalty. Another reason is that itis not a mere licence know-how, but is coupled with engineering. Assuming that the amount deserves to be treated asroyalty, there is one strong circumstance that militates against the department. Section 90 of the Act provides for the relief againstdouble taxation. The provision reads as under: “Agreement with foreign countries or specifiedterritories. 90.1[(1)] The Central Government may enter into anagreement with the Government of any country outsideIndia— (a) for the grant of relief in respect of – (i) income on which have been paid both income-tax underthis Act and income-tax in that country or specified territory,as the case may be, or (ii) income-tax chargeable under this Act and under thecorresponding law in force in that country or specifiedterritory, as the case may be, to promote mutual economicrelations, trade and investment, or (b) for the avoidance of double taxation of incomeunder this Act and under the corresponding law in force inthat country or specified territory, as the case may be, or, “Agreement with foreign countries or specifiedterritories. 90.1[(1)] The Central Government may enter into anagreement with the Government of any country outsideIndia— (a) for the grant of relief in respect of – (i) income on which have been paid both income-tax underthis Act and income-tax in that country or specified territory,as the case may be, or (ii) income-tax chargeable under this Act and under thecorresponding law in force in that country or specifiedterritory, as the case may be, to promote mutual economicrelations, trade and investment, or (b) for the avoidance of double taxation of incomeunder this Act and under the corresponding law in force inthat country or specified territory, as the case may be, or, (c) for exchange of information for the prevention ofevasion or avoidance of income-tax chargeable under thisAct or under the corresponding law in force in that country orspecified territory, as the case may be, or investigation ofcases of such evasion or avoidance, or (d) for recovery of income-tax under this Act andunder the corresponding law in force in that country orspecified terrirory, as the case may be and may, by notification in the Official Gazette, make such provisions asmay be necessary for implementing the agreement. (2) Where the Central Government has entered into anagreement with the Government of any country outside Indiaor specified territory outside India, as the case may be,under sub-section (1) for granting relief of tax, or as the casemay be, avoidance of double taxation, then, in relation to theassessee to whom such agreement applies, the provisionsof this Act shall apply to the extent they are more beneficialto that assessee. (2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are notbeneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless thecontext otherwise requires, and is not inconsistent with theprovisions of this Act or the agreement, have the samemeaning as assigned to it in the notification issued by theCentral Government in the Official Gazette in this behalf. (4) An assessee, not being a resident, to whom anagreement referred to in sub-section (1) applies, shall not beentitled to claim any relief under such agreement unless acertificate of his being a resident in any country outsideIndia or specified territory outside India, as the case may be,is obtained by him from the Government of that country orspecified territory. (5) The assessee referred to in sub-section (4) shallalso provide such other documents and information, as maybe prescribed. Explanation 1.—For the removal of doubts, it ishereby declared that the charge of tax in respect of a foreigncompany at a rate higher than the rate at which a domesticcompany is chargeable, shall not be regarded as lessfavourable charge or levy of tax in respect of such foreigncompany. Explanation 2.-- For the purpose of this section,“specified territory” means any area outside India which maybe notified as such by the Central Government. Explanation 3.-- For the removal of doubts, it ishereby declared that where any term is used in anyagreement entered into under sub-section (1) and notdefined under the said agreement or the Act, but is assigneda meaning to it in the notification issued under sub-section(3) and the notification issued thereunder being in force,then, the meaning assigned to such term shall be deemed tohave effect from the date on which the said agreement cameinto force.” Explanation 2.-- For the purpose of this section,“specified territory” means any area outside India which maybe notified as such by the Central Government. Explanation 3.-- For the removal of doubts, it ishereby declared that where any term is used in anyagreement entered into under sub-section (1) and notdefined under the said agreement or the Act, but is assigneda meaning to it in the notification issued under sub-section(3) and the notification issued thereunder being in force,then, the meaning assigned to such term shall be deemed tohave effect from the date on which the said agreement cameinto force.” It is not dispute that an agreement referable to Section 90 ofthe Act exists between India and the United Kingdom during theassessment years in question. The clauses in the DTAAgreement between India and United Kingdom cover the situationswhen the royalty is paid in respect of (a) any patent, trade-mark,design or model, plan, secret formula or process; (b) industrial,commercial or scientific equipment, or information concerningindustrial, commercial or scientific experience; and (c) any copyright or literary, artistic or scientific work, cinematographic films,and films or tapes for radio or television broadcasting. The relevant clause of the convention dated 16-04-1981between the Government of India and Government of UnitedKingdom of Great Britain and Northern Ireland reads: “Article 7: Business profits – (1) The profits of anenterprise of a Contracting State shall be taxable onlyin that State unless the enterprise carries on businessin the other Contracting State through a permanentestablishment situated therein. If the enterprise carrieson business as aforesaid, the profits of the enterprisemay be taxed in the other State but only so much ofthem as is attributable to that permanentestablishment.” Wide range of Income tax, arising out of the contractsbetween the parties hailing from the respective countries, are dealtwith. Payment of royalty and fee for technical service is dealt withunder Article 13 which reads: “Article 13– Royalties and fees for technical services – (1) Royalties and fees for technical services arisingin a Contracting State and paid to a resident of theother Contracting State may be taxed in that otherState. (2) xxx (3) The term “royalties” as used in this articlemeans payments of any kind including rentalsreceived as a consideration for the use of, or the rightto use— (a) any patent, trade-mark, design or model,plan, secret formula or process; (b) industrial, commercial or scientificequipment, or information concerning industrial,commercial or scientific experience; (c) any copyright of literary, artistic or scientificwork, cinematographic films, and films or tapes forradio or television broadcasting; But does not include royalties or other amounts paid inrespect of the operation of mines or quarries or of theextraction or removal of natural resources…” [clause (2) is omitted] A comparison of the definitions or descriptions of the word“royalty” under Explanation 2 of Section 9(1)(vi) of the Income TaxAct, on the one hand, and the one, under Clause 13(3) of the DTAConvention, on the other hand, discloses that the amount, even ifcalled as royalty, paid by the respondent, to the foreign companygets attracted by the DTA Convention. The scope and ambit of similar clauses in double taxavoidance conventions was dealt with by various High Courts inseveral cases. I n COMMISSIONER OF INCOME TAX vs.NAYVELI LIGNITE CORPORATION LTD (2 supra), the Madras High Court dealt with a clause, which is similar to the one,incorporated under the contract between the respondent therein, aforeign company. It has already been mentioned that the transferof know-how was for a limited purpose of recovery of themachinery, etc., that was supplied, and not in general terms. TheMadras High Court took the view that it was covered under theDTA regime. Similarly in COMMISSIONER OF INCOME TAX vs. D.C.M. LTD (3 supra), the Delhi High Court held: The scope and ambit of similar clauses in double taxavoidance conventions was dealt with by various High Courts inseveral cases. I n COMMISSIONER OF INCOME TAX vs.NAYVELI LIGNITE CORPORATION LTD (2 supra), the Madras High Court dealt with a clause, which is similar to the one,incorporated under the contract between the respondent therein, aforeign company. It has already been mentioned that the transferof know-how was for a limited purpose of recovery of themachinery, etc., that was supplied, and not in general terms. TheMadras High Court took the view that it was covered under theDTA regime. Similarly in COMMISSIONER OF INCOME TAX vs. D.C.M. LTD (3 supra), the Delhi High Court held: “The know-how is intellectual property andexcluded clauses referred to above pertained to theknow-how of secret formula or process and theimparting of any information concerning the workingthereof. The assessee, in our view, is right insubmitting that the things for the transfer of which DCMagreed to pay to TL 81,55,000 as such squarely fellwithin these two exclusionary clauses which do notform part of the definition of the term ‘royalty’ underart.XIII(3) of the DTAA. The IT authorities in our view,were not right in being influenced by the term‘payments of any kind’ preceding the definition of thisterm under the DTAA.” This Court, way back in 1977, dealt with a conventionbetween India and Holland, in the context of Section 90 of the Act. Justice Chinnappa Reddy, as His Lordship then was, took note ofall the relevant cases that were decided by that time and held in Hindustan Shipyard’s case (4 supra) as under: “Para28: It is true that the Polish company agreed torender certain limited services. But those serviceswere connected with the effective fulfilment of thecontract of sale and were merely incidental to the contract, usually included in all such contracts, by wayof guarantee of the efficient working of the productssold. They were not services which created an interestof the type seen in the case of Carborundum Co.(supra). We answer the question referred to us infavour of the assessee. The assessee is entitled to thecosts of the reference. Advocate’s feeRs.250.” In COMMISSIONER OF INCOME TAX vs. SUNDWIGER EMFG & CO. (5 supra), this Court dealt with a transaction, whichis similar to the one, which is the subject matter of this case, andheld that the different components of the contract cannot be readin isolation. The relevant portion reads, “Para 21: A plain and cumulative reading of theterms and conditions of the contract entered intobetween the principal to principal i.e., foreign companyand Midhani i.e., preamble of the contract, Parts I and IIof the contract and also the separate agreement, asreferred to above, would clearly show that it was oneand the same transaction. The one cannot be read inisolation of the other. The services rendered by theexperts and the payments made towards the samewas part and parcel of the sale consideration and thesame cannot be severed and treated as a businessincome of the non-resident company for the servicesrendered by them in erection of the machinery inMidhani unit at Hyderabad…” From the above discussion, it becomes clear that, a)the amount paid by the respondent to the foreign companyis part of lumpsum consideration for supply of technicalknow-how, machinery installation and erection and theis part of lumpsum consideration for supply of technicalknow-how, machinery installation and erection and the same cannot be treated as royalty and b)even if the amount is to be treated as royalty, it standscovered by the DTA – convention dated 16-04-1981 andthereby the amount is not liable to taxation in India.covered by the DTA – convention dated 16-04-1981 andthereby the amount is not liable to taxation in India. Therefore, questions 1 to 3 are answered against the Revenue. From the above discussion, it becomes clear that, a)the amount paid by the respondent to the foreign companyis part of lumpsum consideration for supply of technicalknow-how, machinery installation and erection and theis part of lumpsum consideration for supply of technicalknow-how, machinery installation and erection and the same cannot be treated as royalty and b)even if the amount is to be treated as royalty, it standscovered by the DTA – convention dated 16-04-1981 andthereby the amount is not liable to taxation in India.covered by the DTA – convention dated 16-04-1981 andthereby the amount is not liable to taxation in India. Therefore, questions 1 to 3 are answered against the Revenue. So far as question Nos.4 and 5 are concerned, certain factsneed to be noticed. It is not in dispute that it is only on19.11.1990, that an order came to be passed under Section 163(2)of the Act treating the respondent as an agent of non-resident. The time for filing returns for assessment year 1988-89 was toexpire by November, 1987 and for assessment year 1989-90, inNovember, 1989. Since it is only after 19.11.1990, the respondentwas treated as the agent of a non-resident, there was no obligationon the respondent to file a return for 1988-89 and 1989-90 forwhich the time for filing return had expired in November, 1987 andNovember, 1989 itself. In that view of the matter, there was noobligation on the part of the respondent to discharge the statutoryobligation prior to 19.11.1990. As there was no obligation on thepart of the respondent to file a return prior to the date of its beingtreated as a representative of the foreign company, there was noobligation to file returns prior to that date. Therefore, the liability topay interest under Section 139(8) of the Act, cannot be fastenedon the respondent. Apart from this, definition of tax does not include componentof interest. Section 2(43) of the Act defines tax in relation to theassessment year and the same is mentioned hereunder: “Section 2(43)" tax" in relation to the assessmentyear commencing on the 1st day of April, 1965 ,and any subsequent assessment year meansincome- tax chargeable under the provisions of thisAct, and in relation to any other assessment yearincome- tax and super- tax chargeable under theprovisions of this Act prior to the aforesaid date.” Therefore, question Nos.4 and 5 are to be answered in theaffirmative i.e., against the Revenue and in favour of therespondent. All the Appeals are accordingly dismissed. MiscellaneousPetitions, if any pending in these appeals shall also disposed of. There shall be no order as to costs. ___________________________ L. NARASIMHA REDDY, J 06-11-2014ks/KO/gk ____________________________ CHALLA KODANDA RAM, J [1](1968) 68 ITR 786 (MAD)(1968) 68 ITR 786 (MAD) [2](2000) 243 ITR 459 (Mad)(2000) 243 ITR 459 (Mad) [3](2011) 336 ITR 599(2011) 336 ITR 599 [4](1977) 109 ITR 158 (AP)(1977) 109 ITR 158 (AP) [5](2003) 262 ITR 110 (AP)(2003) 262 ITR 110 (AP) [6](2010) 329 ITR 442(2010) 329 ITR 442 [7](2014) 48 TAXMANN.COM 67 (Bombay)(2014) 48 TAXMANN.COM 67 (Bombay)