The Majestic Auto Ltd., Ludhiana v. The Commissioner Of Income Tax, Ludhiana

IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH. 357ITR-602-1995 (O&M)Date of Decision : 24.07.2019 The Majestic Auto Ltd., Ludhiana ... Appellant Versus The Commissioner of Income Tax, Ludhiana. ...Respondent CORAM: HON'BLE MR. JUSTICE AJAY TEWARIHON'BLE MR. JUSTICE HARNARESH SINGH GILL Present:Mr. Alok Mittal, Advocate for the appellant, Mr. Rajesh Katoch, Senior Standing counsel withMs. Pridhi Jaswinder Sandhu, Junior Standing Counselfor the Income Tax Department. AJAY TEWARI, J (ORAL) inThis reference has been made to consider the following questions :- "1,Whether on the facts and in the circumstances of thecase and interpretation of the agreement of the assessee-company Majestic Auto Limited with Steyr-Daimler-PUCHAG(PUCH), Austria and Convention for avoidance of doubletaxation between India and Austria, the Hon'ble Tribunal wasright in holding that the sum of Rs.9,34,579/- paid to Puch wassubjected to deduction of tax at source? 2 Whether on the facts and in the circumstances of thecase and the material on record, the Appellate Tribunal wasright in holding that the consideration pain to Puch for supplyof designs, drawings and specifications was nothing but"royalty" and subjected to deduction of tax at source? 3Whether on the facts and in the circumstances of thecase and true interpretation of the documents, the Hon'bleTribunal was right in holding that there was no distinction between the expression "supply" and "use" for the supply ofdesigns and drawings and thus the provisions of tax deductionat source were applicable to the above payment?" 2 The brief facts are that the assessee had entered into anagreement with Steyr-Daimler-Puch AG (Puch), (Materised Two WheelDivision), Austria, whereby the letter head granted to the assessee exclusiveand individual right and licence to use manufacturing information suppliedby PUCH to manutacture, assemble and sell in India vehicle Maxi Plus andSuper Maxi. As per Clause No. 1.4 PUCH supplied drawings, designs,specifications, processes, schedule and all other relevant technical detailsand documents to the assessee for which the assessee paid an amount of 3Million Austrian Schilling in three installments as detailed below:- a) First 1/3[rd]after agreement is filed with Reserve Bank of Indiaand the Capital Goods Clearance if any, is obtained, however,not later than 10 days from the date of approval of ReserveBank of India. and the Capital Goods Clearance if any, is obtained, however,not later than 10 days from the date of approval of ReserveBank of India. b) Second 1/3[rd]on delivery of technical documentation (asdefined in Annex. 2) however, not later than 30 days afterreceipt of PUCH's confirmation that the complete technicaldocumentation has been delivered.defined in Annex. 2) however, not later than 30 days afterreceipt of PUCH's confirmation that the complete technicaldocumentation has been delivered. c) Third and final 1/3[rd]on the commencement of commercialproduction or four years after agreement is filed with RBIwhicheveris |production or four years after agreement is filed with RBIwhicheveris | 3The agreement further had a separate Clause No. 2.1 for royalty asper which after the production started the assessee would pay 1% as royaltyup to 50,000 vehicles, .75% royalty from 50,000 to 100,000 vehicles and .5% royalty above more than 100,000 vehicles produced. At this stage, itwould be apposite to notice that there is no dispute that on the royalty paidunder Clause 2.1, the assessee is liable to deduct tax at source. 4The dispute in the present case is whether similarly for thepayment of 3 million Austrian schilling also the assessee was liable todeduct tax at source? c) Third and final 1/3[rd]on the commencement of commercialproduction or four years after agreement is filed with RBIwhicheveris |production or four years after agreement is filed with RBIwhicheveris | 3The agreement further had a separate Clause No. 2.1 for royalty asper which after the production started the assessee would pay 1% as royaltyup to 50,000 vehicles, .75% royalty from 50,000 to 100,000 vehicles and .5% royalty above more than 100,000 vehicles produced. At this stage, itwould be apposite to notice that there is no dispute that on the royalty paidunder Clause 2.1, the assessee is liable to deduct tax at source. 4The dispute in the present case is whether similarly for thepayment of 3 million Austrian schilling also the assessee was liable todeduct tax at source? 5 The A.O. held that even for the payment of 3 million AustrianSchilling, the assessee was liable to deduct tax at source since it was in thenature of royalty payment. In an appeal filed by the assessee, theCommissioner held that this payment was not royalty payment and as perthe convention signed between the Government of India and Austria for theavoidance of double taxation with respect to taxes on income, the amount of3 million Austrian shillings would be taxable in the hands of PUCH inAustria and would not be exigible to tax in India since it was not paymentmade for royalty. The Revenue carried the matter to the Tribunal. It was thecase of the assessee that the payment of 3 million Austrian Schilling was forthe supply of material and their use would arise when the vehicles would beStarted to be produced and at that stage royalty would become payable. Themain plank on which the Tribunal passed its decision was its interpretationof the word ‘supply and it held that 'supply' includes ‘use’. 6 At this stage, it would be important to understand the concept of‘royalty’ . To our mind 'royalty is a payment to an ownerfor the ongoing useof its assets or property such as patents or natural resources for businesspurposes. 7 Word 'royalty' has been defined by the Supreme Court in the casetitled as Entertainment Network (1) Ltd. v. Super Cassette Inds. Ltd.,, payment to performers."and further in the case titled asState of H.P. v.Raja Mahendra Pal,1999 (4) SCC 43 as"a payment reserved by thegrantor of a patent, lease of a mine or similar right, and payableproportionately to the use made of the right by the grantee, which shall onpayment of money, but may be a payment in kind being the part of theproduce of the exercise of the right."(excerpts taken from the SupremeCourt on Words, Phrases and Legal Expressions (Judicially defined) 1950-2015 Volume IIL, 8.Word ‘Royalty’ has been defined in Oxford Advanced Learner'sDictionary (New 9th Edition) as 'a sum of money that is paid by an oil ormining company to the owner of the land that they are working on’ Q Thus understood, the assessee would have to pay a certain amountof money to PUCH for every vehicle which is sold using its designs. 10.In our considered opinion, the Tribunal has given an unnaturaland strained meaning to the expression ‘supply’. Yes, by entering into theagreement and by supplying the material PUCH authorized its use but itsactual use would start only when production and sale commenced and thatwould be the stage at which royalty would be payable, ll.No other argument has been raised before us.12)Though the reference is answered in favour of the assessee andagainst the revenue. (AJAY TEWARI )JUDGE 24.07.2019pooja saini Whether speaking/reasoned?Whether reportable? ( HARNARESH SINGH GILL )JUDGE Yes/NoVes/No