IT/ILT : Payment for use of technical information and know-how which is not for transfer of rights in defined territory, has to be considered as royalty
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[2013] 38 taxmann.com 57 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'L'
Bayer Pharma AG, Germany
v.
Deputy Director of Income-tax (International Taxation), Range -2(1), Mumbai*
RAJENDRA SINGH, ACCOUNTANT MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
AND VIVEK VARMA, JUDICIAL MEMBER
IT APPEAL NOS. 5465 & 6628 (MUM.) OF 2008
[ASSESSMENT YEAR 2004-05 AND 2005-06]
[ASSESSMENT YEAR 2004-05 AND 2005-06]
SEPTEMBER 13, 2013
Section 9 of the Income-tax Act, 1961, read with article 12 and article 13, of the Double Taxation Avoidance Agreement between India and Germany - Income - Deemed to accrue or arise in India [Royalties] - Whether where it was a case of payment for use of technical information and trademark and not for transfer of rights in defined territory, such payment for use of technical information and know-how has to be considered as royalty both under provisions of Act and under provisions of DTAA between India and Germany even if payment is lump sum and not recurring - Held, yes - Whether where royalty had been received in connection with use of technical information and trademark for purpose of business or profession carried on in India, for purpose of taxability of royalty in case of non-resident, it is not necessary that he should have a PE in India - Held, yes - Whether royalty under section 9(1)(vi) will be income of non-resident whether or not non-resident has a residence or place of business or business connection in India or has rendered any services in India - Held, yes [Para 4] [In favour of revenue]
FACTS
| ■ | The assessee-company, a leading global pharmaceutical company and a resident of Germany, had received a sum of Rs. 18,39, 65,030 in assessment year 2004-05 and Rs. 8,58, 42, 624 in assessment year 2005-06 from Indian company in terms of the agreement dated 17-2-2003 for transfer of technology know-how and trademark between the assessee-company and the Indian company. The assessee in the returns of income filed for the two years under reference had claimed the above sums as exempt treating the same as capital gain arising on transfer of technology, know-how and trademark. | |
| ■ | The assessee submitted before the Assessing Officer that in terms of the DTAA between India and Germany, capital gain arising from alienation of such property was taxable only in the country of residence. It was pointed out that the assessee had transferred the technology, know-how and trademark and, therefore, capital gain arising therefrom was taxable only in Germany under article 13(5) of DTAA between India and Germany. | |
| ■ | The Assessing Officer, however, did not accept the claim. After examination of records and the relevant terms and conditions of the agreement, the Assessing Officer noted that the agreement had been made for transfer of technology, know-how and trademark in respect of certain products. The Assessing Officer noted that the Indian transferee-company had been manufacturing the same products in India and also marketing the same since last several years under license. The assessee, who was a shareholder of Indian company holding more than 12.5 per cent of shares was not charging any fees from Indian company. The assessee had now signed an agreement as per which payments were made for the transfer of the same technology, know-how and trade mark, which was already being used by the transferee. | |
| ■ | The Assessing Officer noted that the definition of the term 'royalty' as per the DTAA between India and Germany clearly mentioned that any payment received as a consideration for use of or the right to use any trademark, design or model, formula or process etc. was covered as royalty which was taxable under article 12 of the DTAA between India and Germany. The Assessing Officer also observed that the article clearly mentioned payment of any kind which meant that the payment could be either in instalments or lump sum payment and it was not necessary that there should be only recurring payments for the same to be considered as royalty. The Assessing Officer further observed that the assessee in assessment year 2003-04 in which party of the payment under the same agreement had been received, had offered the payment as royalty under article 12 of the DTAA between India and Germany. The Assessing Officer, concluded that the assessee had received lump sump payment as consideration for past use as well as for future use of the technology, know-how and trademark which was nothing but royalty and was taxable in India. He, therefore, taxed the payment received by the assessee as royalty at the rate of 10 per cent. | |
| ■ | On appeal, the Commissioner (Appeals) concluded that the assessee remained the absolute owner of technology, know-how and trademark which had only been assigned to the Indian transferee company for use. Therefore, even if the use was for an indefinite period, it had to be considered only as royalty and not as capital gain on transfer of property. | |
| ■ | On appeal to the Tribunal: |
HELD
| ■ | The true nature of transaction cannot be determined only on the basis of the words 'transfer', 'assignor', 'assignee' used in the agreement but on careful consideration of the real nature of transaction after taking into account the effect of all the clauses in the agreement. In case of transfer even for a limited period the transferee should have an unfettered right to use the asset as an owner. In case there are limitations placed on transferee, the transaction could not be considered as transfer. Though clause 2.1 of the agreement provides for assignment and transfer technical information and trademark for perpetual and exclusive use forever in the territory, a careful perusal of other clauses of the agreement shows that the assessee has not been given ownership right over the technical information and trademark and there are limitations placed on exercise of such rights by the assignee. The assignee in terms of clause 2.2 cannot use or utilize the technical information or the trademark for sale of products either directly or indirectly outside the territory without prior approval of the assessee, which would be at its absolute discretion. Thus, the assignee could produce only limited quantity which could be sold within the territory. Therefore, there are limits on use of technical information and trademark which could not be in case of outright sale or transfer in which case the buyer will be free to deal with the asset in the manner he likes. | |
| ■ | Further the assignee cannot license or assign or transfer the technical information and trademark to any person other than the affiliates of the transferee as per clause 6.2. Therefore, the right in the technical information and the trademark is limited only to the user by the assignee and the affiliates. There is also confidential clause in articles 8.1 and 8.2 as per which the assignee cannot communicate the know-how and the technical information or any other confidential information to anyone else other than the employees without the assessee's prior consent and the assignee is also required to make sure that the employees and licensees did not disclose any of the confidential information to any other person or organization. Further as per clause 12.1 even if the assessee could license or assign the technical information/trademark to Cadila Healthcare affiliates, the latter is also bound by the terms and conditions of this agreement. In case of trademark, article 7.1 makes it quite clear that all trademarks and trade-names shall always remain the exclusive property of the assessee in the territory. Therefore, in so far as the trademark/trade names is concerned the assessee has not transferred the rights and has only allowed the use of it which is obvious from the agreement. | |
| ■ | As regards the technical information and know-how though the right granted is exclusive and perpetual but it is only for use of the technical information and know-how as pointed out earlier. Though para 4 of the preamble to the agreement referred to by the assessee speaks of transfer, the said para makes it clear that the transfer is for use in the defined territory. The words 'assignment' and 'transfer' used in other clauses of the agreement as mentioned earlier are also for use of the technical information and the trademark. There is no clause in the agreement which speaks of transfer of right of the technical information and trademark. There are also several restrictions on the assignee in the matter of use of technology, know-how and trademark which makes it quite clear that the assignee has not been given ownership rights and only right to use. [Para 7.3] | |
| ■ | As regards the relinquishment of rights in the defined territory, it may be mentioned that the assessee had not relinquished the rights completely even in the defined territory as the assessee exercised sufficient control in the manner of utilization of technical information and trademark as mentioned earlier and, therefore, it could not be considered as the case of outright sale or transfer. [Para 7.5] | |
| ■ | Therefore, it was a case of payment for use of technical information and trademark and not for transfer of rights in the defined territory. Such payment for use of technical information and know-how has to be considered as royalty both under the provisions of Income-tax Act and under the provisions of DTAA between India and Germany even if the payment is lump sum and not recurring. | |
| ■ | There is no dispute that the royalty under the provisions of article 12 of DTAA between India and Germany is taxable in India. The assessee argued that even if the payment was considered as royalty, the same was not taxable even under article 9(1)(vi). There is merit in such arguments. The royalty had been received in connection with use of technical information and trademark for the purpose of business or profession carried on in India. | |
| ■ | For the purpose of taxability of royalty in case of the non-resident, it is not necessary that he should have a PE in India. Explanation to section 9(2) inserted by the Finance Act, 2010 with retrospective effect from 1-6-1976 makes it quite clear that royalty under section 9(1)(vi) will be the income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India or has rendered any services in India. | |
| ■ | Therefore, the royalty is taxable in India under section 9(1)(vi) as well as under the provisions of DTAA. The orders of Commissioner (Appeals) taxing the payments as royalty in both the years was to be upheld. [Para 8] |
CASE REVIEW
Atlas Capco AB of Sweden v. CIT [2012] 18 taxmann.com 159/205 Taxman 5 (Bom.) (para 7.4) followed.
A.R. Krishnamurthy v. CIT [1989] 176 ITR 417/43 Taxman 30 (SC); CIT v. Koyo Seiko Co. Ltd. [1998] 233 ITR 421/[1999] 102 Taxman 291(AP) (para 7.4) and Swadeshi Polytex Ltd. v. ITO [1991] 38 ITD 328 (Delhi) (para 7.5) distinguished.
CASES REFERRED TO
G.U.J. Jaeger GmbH v. ITO [1991] 37 ITD 64 (Mum.) (para 4), First ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Mum.) (para 4), Atlas Capco AB of Sweden v. Dy. CIT [1995] 53 ITD 293 (Mum.) (para 4), Dy. CIT v. All Russia Scientific Research Institute of Cable Industry, Moscow [2006] 98 ITD 69/[2005] 145 Taxman 1 (Mag.) (Mum.) (para 4), Asstt. CIT v. Snia Fibre SPA [1996] 55 TTJ 554 (Delhi) (para 4), Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W (SC) (para 4.2), A.R. Krishnamurthy v. CIT [1989] 176 ITR 417/43 Taxman 30 (SC)(para 4.2.1), Traders and Mines Ltd. v. CIT [1955] 27 ITR 341 (Patna) (para 4.2.1), R.K. Palshikar (HUF) v. CIT [1988] 172 ITR 311/38 Taxman 166 (SC) (para 4.2.1), CIT v. Koyo Seiko Co. Ltd. [1998] 233 ITR 421/[1999] 102 Taxman 291 (AP) (para 4.2.1), Swadeshi Polytex Ltd. v. ITO[1991] 38 ITD 328 (Delhi) (para 4.2.1), International Tire Engg. Resources LLC., In re [2009] 319 ITR 228/185 Taxman 209 (AAR-New Delhi)(para 5), Atlas Capco AB of Sweden v. CIT [2012] 18 taxmann.com 159/205 Taxman 5 (Bom.) (para 5) and Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402 (SC) (para 6).
F.Y. Irani for the Appellant. Narender Kumar for the Respondent.
ORDER
Rajendra Singh, Accountant Member - These appeals by the assessee are directed against the orders dated 10.4.2008 and 1.8.2008 of CIT(A) for the assessment years 2004-05 and 2005-06. The dispute raised in these appeals is regarding taxability of the sum received by the assessee from M/s German Remedies Ltd (later merged with M/s Cadila Healthcare Ltd) for transfer of technology, know how and trademark as royalty. Since identical disputes have been raised in both the appeals, these are being disposed off by a single consolidated order for the sake of convenience. The assessee subsequently vide letter date 28.6.2013 has also filed additional ground to the effect that the impugned payments are not taxable either under the provisions of the Income Tax Act 1961 or under the provisions of Double Taxation Avoidance Agreement (DTAA) between India and Germany. The additional ground being legal ground and the facts relating thereto being already on record was admitted by Tribunal for adjudication.
2. The facts in brief are that the assessee company, a leading global pharmaceutical company and a resident of Germany, had received a sum of Rs. 18,39,65,030/- in assessment year 2004-05 and Rs. 8,58,42,624/- in assessment year 2005-06 from M/s German Remedies/Cadila Healthcare Ltd. in terms of the agreement dated 17/2/2003 for transfer of technology know how and trademark between the assessee company and the German Remedies Ltd. M/s German Remedies Ltd., subsequently, merged with Cadila Healthcare Ltd w.e.f 2.12.2003. Therefore, the payments after 2.12.2003 have been received from Cadila Healthcare Ltd., though the nature of payment and the terms and conditions of the agreement remained the same. The assessee in the returns of income filed for the two years under reference had claimed the above sums as exempt treating the same as capital gain arising on transfer of technology, know how and trademark. The assessee submitted before the AO that in terms of the DTAA between India and Germany, capital gain arising from alienation of such property was taxable only in the country of residence. It was pointed out that the assessee had transferred the technology, know how and trademark and, therefore, capital gain arising there from was taxable only in Germany under Article 13 (5) of DTAA between India and Germany.
2.1 The AO, however, did not accept the claim. After examination of records and the relevant terms and conditions of the agreement, the AO noted that the agreement had been made for transfer of technology, know how and trademark in respect of certain products details of which have been given in para 4 of the assessment order. The AO noted that the transferee company i.e German Remedies had been manufacturing the same products in India and also marketing the same since last several years under license. The assessee, who was a share holder of Germam Remedies holding more than 12.5% of shares was not charging any fees from German remedy. The assessee had now signed an agreement as per which payments were made for the transfer of the same technology, know how and trade mark, which was already being used by the transferee. He referred to the RBI approval as per which the payment was required to be made as consideration for technical know how fees. Duration of the agreement was ten years from the date of agreement or seven years from the date of commercial production whichever came earlier. AO, therefore, proceeded to examine the nature of payment i.e. whether it should be considered as royalty or capital gain.
2.2 AO referred to the provisions of section 9(1)(vi) of the Income Tax Act as per which royalty received by a non resident from another non resident in respect of any right, property or information used or services utilized was taxable in India if the same was used for the purpose of business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India. The royalty had been defined in the Explanation 2 of section 9(1)(vi) as under:—
'Explanation 2—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains" for—
| (i) | the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; | |
| (ii) | the imparting of any information concerning the working of, or the use of, a patent invention model, design, secret formula or process or trade mark or similar property; | |
| (iii) | the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; | |
| (iv) | the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; | |
| (iva) | the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; | |
| (v) | the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or | |
| (vi) | the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)'. |
2.3 AO observed that the definition of royalty given in Explanation 2 of section 9(1)(vi) clearly showed that any consideration for transfer of all or any right in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property or for use of any such assets was taxable as royalty in India. The AO also referred to the provisions of DTAA between Indian and Germany in which the term "royaltie" has been defined as under:-
'The term "royalty" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, of the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.'
2.4 The AO noted that the definition of the term "royalty" as per the DTAA between India and Germany clearly mentioned that any payment received as a consideration for use of or the right to use any trademark, design or model, formula or process etc. was covered as royalty which was taxable under Article 12 of the DTAA between India and Germany. AO also observed that the Article clearly mentioned payment of any kind which meant that the payment could be either in installments or lump sump payment and it was not necessary that there should be only recurring payments for the same to be considered as royalty. AO further observed that the assessee in assessment year 2003-04 in which part of the payment under the same agreement had been received, had offered the payment as royalty under Article 12 of the DTAA between India and Germany. AO, therefore, concluded that the assessee had received lump sump payment as consideration for past use as well as for future use of the technology, know how and trademark which was nothing but royalty and was taxable in India. He, therefore, taxed the payment received by the assessee as royalty at the rate of 10%.
3. The assessee disputed the decision of AO and submitted before CIT(A) that the conclusion drawn by AO that the payments received by assessee were taxable as royalty was not correct. The assessee argued that the nature of payment was required to be examined in terms of the various clauses of the agreement. The assessee referred to para 4 of the preamble of the agreement which stated that the assignor was prepared to transfer the technology, know how and trademark to the assignee for use within the defined territory. It was pointed out that the word "assign" as per Oxford Dictionary meant transfer. Therefore, the agreement was clearly for transfer of technology, know how and trademark. Further Article 2.1 of the agreement clearly mentioned that the assessee shall assign and transfer the technology, know how and technology information and trademark to the assignee for perpetual and exclusive use, forever in the territory for manufacture and making of the product. It, therefore, showed that it was an irreversible transfer. Further as per Article 2.4 neither the assignor nor the assignee was under any obligation to transfer and assign any improvement made to the technical information which showed that the assignee was the owner of the technical information. Further as per Article 2.6, the assessee was entitled to register the products in the territory in its own name. Article 6.2 also provides that the assignee could license or assign or transfer the technology and know how or the technical information or the trademark to any group affiliates.
3.1 Thus the various clauses of the agreement referred to above clearly showed that it was a case of transfer of technology, know how and trademark. Referring to the RBI approval, it was pointed that the approval only mentioned lump sump payment for the use of trademark and technology know how and there was nothing mentioned in the approval about royalty payment. The assessee further submitted that the word "property" as defined in section 2(14) was the word of widest amplitude and included any right in the property. Further section 32 w.e.f assessment year 1999-2000 recognized technical, know how and trademark as an intangible asset on which depreciation was allowable. Therefore, the technical, know how and trademark which are clearly covered by the definition of property have been transferred in this case for perpetual use by the assignee for certain consideration. Therefore, it was a case of capital gain on transfer of property which was covered by the Article 13.5 of the DTAA between India and Germany and was taxable only in the country of residence i.e. Germany.
4. CIT(A), however, did not accept the contentions raised by the assessee. He referred to the Article 2.2 of the agreement as per which the assignee could not use or utilize the technology, know how or technical information or the trademarks for sale of products either directly or indirectly outside the territory without the prior approval of the assignor, which would be on absolute discretion of the assignor. Articles 6.2 provided that the assignee shall not license or assign or transfer the technology, know how and technical information or trademark to any person who is not a Cadila affiliate. All the third party claims were required to be reported immediately to the assignor as per Article 6.3. Article 8.1 required that the assignee shall not communicate or otherwise release any know how or technical information and any other confidential information to any one else other than assignee's employees without the assignor's prior written consent. Further as per Article 8.2 the assignee was required to make sure that its employees and licencees did not disclose any of the confidential information to any other person or organisation. Article 12.1 provided that the technology, know how etc could be transferred to the Cadila affiliates in accordance with the agreement so long as Cadila affiliate was bound by the terms and conditions of the agreement. CIT(A) also referred to Article 7.1 as per which all trademarks and trade-names shall always remain the exclusive property of the assignor in the territory. He also referred to the RBI approval which clearly mentioned the payments as technical know how fees and drawing and design fees and for trademark etc. which was required to be paid in three installments. Further, the RBI approval was for a period of ten years from the date of agreement or for seven years from the date of commencement of commercial production whichever was earlier. The agreement between the two parties was subject to approval of RBI who had given approval only for a limited period. Therefore, it could not be said that the agreement was perpetual Considering the provisions of the agreement contained in the various clauses referred to above and the RBI approval. CIT(A) concluded that the assessee remained the absolute owner of technology, know how and trademark which had only been assigned to German Remedies/Cadila Healthcare Ltd for use. Therefore, even if the use was for an indefinite period, it had to be considered only as royalty and not as capital gain on transfer of property. CIT(A) referred to several decisions of Tribunal in which under similar situations the payments have been held to be assessable as royalty and not capital gain. These decisions of the Tribunal are mentioned below:-
| (i) | in case of G.U.J. Jaeger GmbH v. ITO [1991] 37 ITD 64 (Mum) | |
| (ii) | in case of First ITO v. Automobile Peuggeot [1989] 30 ITD 329 (Mum) | |
| (iii) | in case of Atlas Capco AB of Sweden v. Dy. CIT [1995] 53 ITD 293 (Mum) | |
| (iv) | in case of Dy. CIT v. All Russia Scientific Research Institute of Cable Industry, Moscow [2006] 98 ITD 69/[2005] 145 Taxman 1 (Mag.) (Mum). | |
| (v) | in case of Asstt. CIT v. SNIA FIBRE SPA [1996] 55 TTJ 554 (Delhi). |
4.1 CIT(A), therefore, held that the payment was taxable as royalty in India. He accordingly upheld the order of AO, aggrieved by which the assessee is in appeal before Tribunal.
4.2 Before us, learned AR for the assessee reiterated the submissions made before lower authorities that the assessee had assigned the technical know how etc to German Remedies/Cadila Healthcare Ltd. which meant transfer of right of the assessee in the property. It was pointed out that the agreement clearly referred the assessee as assignor and the other party as assignee. Further the Article 2.1 of the agreement clearly mentioned that the technology, know how, etc. had been assigned for perpetual and exclusive use forever, which only meant that the right of the assessee in the property had been transferred to the assignee forever. The assignee had also power to assign the right to associates, which power is available only in case of owner. He referred to the definition of the word "transfer" in section 2(47) which meant sale, exchange, relinquishment of asset or extinguishment of any right therein. Thus, it was argued, that if any of the rights held by the assessee in the asset is assigned, it amounted transfer. The learned AR also referred to the judgment of Hon'ble Supreme Court in case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W in which it was held that transfer of property may involve transfer of entire bundle of rights or transfer of only some of the rights. It could also involve reduction of the exclusive interest of a person in the totality of the rights through a joint or shared interest. The assessee in this case had rights over the technology, know how, trademark etc which had been transferred to the assignee in a particular territory. Therefore, even if the assessee had retained the right over the technology, know how etc in other parts of the world, it had transferred its rights in the territory mentioned in the agreement which amounted to transfer of capital asset.
4.2.1 He also referred to the judgment of Hon'ble Supreme Court in case of A.R. Krishnamurthy v. CIT [1989] 176 ITR 417/43 Taxman 30 in which it was held that granting lease right was a capital asset. It was held that the right of the owner of land included right to lease, to exploit the land. Therefore, the lump sump payment received for granting lease was held assessable as capital gain. The Hon'ble Supreme Court in that case, it was pointed out, had referred to the judgment of Hon'ble High Court of Patna in case of Traders and Miners Ltd. v. CIT [1955] 27 ITR 341 in which it was held that transfer meant not only permanent transfer but also temporary transfer of title in the property for any period. The view taken by the Hon'ble High Court of Patna had been afffirmed by the Supreme Court in case of R.K. Palshikar (HUF) v. CIT [1988] 172 ITR 311/38 Taxman 166. Therefore, it was held that there was transfer of title in favour of the lessee, though the lessor had right of reversal after the period of lease terminated. The Learned AR pointed out that the case of the assessee was similar and, therefore, even if it was considered that technology, know how, etc had been assigned for a limited period, it amounted to transfer in the light of aforesaid judgments. The learned AR also placed reliance the judgment of Hon'ble High Court of AP in case of CIT v. Koyo Seiko Co. Ltd. [1988] 233 ITR 421/[1999] 102 Taxman 291 in which the Japanese company had supplied drawings and data connected to the project in India. It was noted that the Japanese company had sold the secret process for the period of nine years and thus was held that the Japanese Company had exclusive knowledge part of which was lost in India. Therefore, the amount received was a capital receipt. Reference was also made to the decision of Delhi Bench of Tribunal in case of Swadeshi Polytex Ltd. v. ITO [1991] 38 ITD 328 in which the payment received for supply of technical, know how had been held assessable as capital gain and not royalty. It was thus argued that amounts received by the assessee in this case were for transfer of technology, know how and technical information which was assessable as capital gain. The transfer had taken place in Germany which was clear from Article 16 of the agreement. Therefore, under Article 13.5 of DTAA the amount was taxable only in Germany.
4.3 The learned AR also submitted that the amount was not assessable as royalty even under the provisions of domestic Act. Referring to the definition of royalty under Explanation 2 to section 9(1)(vi) it was submitted that though the definition of royalty also included any consideration for transfer of any right in respect of any patent, invention, model, design, secret formula or process or trademark or similar property, the definition explicitly excluded any consideration which would be the income of the recipient chargeable under the head "capital gain". Therefore, once the sum was found chargeable as capital gain, it will be out of the purview of term "royalty" even under the Income Tax Act. As regards the royalty defined under the DTAA, it meant only payment for use or right to use technology, know how, information etc. which was not so in this case as pointed out earlier. Therefore, neither under the domestic Act nor under the DTAA the payment received was taxable as royalty. It was accordingly urged that the claim of the assessee to exempt the payments as capital gain should be accepted.
5. Learned CIT (DR) on the other hand strongly defended the orders of authorities below. He referred to the various Articles of the agreement already discussed by CIT(A) to point out that cumulative effect of all such Articles supported the findings of authorities below that it was a case of only use or right to use the asset and not transfer of asset. He also referred to the various decisions of Tribunal relied upon by CIT(A) to point out that the case of the assessee was similar to those cases in which it has been held that such payments are taxable as royalty. In addition learned DR also referred to the judgment of Authority for Advance Ruling in case of International Tire Engg. Resources LLC, In re [2009] 319 ITR 228/185 Taxman 209 (AAR - New Delhi) in which the payment received for grant of perpetual irreversible right to use know how for manufacturing of radial tires has been found assessable as royalty. It was pointed out that the case of the assessee was similar. He also referred to the decision of Mumbai bench of Tribunal in case of Atlas Capco AB of Sweden (supra) which related to supply of technology, know how and trademark for manufacturing of screw type air conditioners. It was pointed out that in that case also there were similar clauses like secrecy clause and limitation on the right of the assignee in dealing with the know how and even after considering these factors, the Tribunal held that it was not a case of transfer but only a case of use of know how and the amount was held assessable as royalty. It was pointed out that the said decision of the Tribunal has been upheld by the Hon'ble High Court of Bombay in Atlas Capco AB of Sweden v. CIT [2012] 18 taxmann.com 159/209 Taxman 5. The High Court upheld the view taken by the Tribunal that the assessee had retained all the rights in the know how to itself and only limited right to use the know how had been parted with. Therefore it was held that it was not a case of outright sale. It was, therefore, urged that the order of CIT(A) upholding the payment as royalty should be confirmed.
6. In reply the learned AR for the assessee submitted that the various judgments relied upon by the learned DR were distinguishable. It was pointed out that in case of Atlas Capco AB of Sweden (Supra) relied upon by the learned DR, the agreement was not perpetual but only for a period of 5 years though it could be further renewed as per the agreement. Either party could terminate the agreement on happening of certain events, which was not so in the present case. In the case of International Tires Engg. Resources LLC (Supra) referred to by learned DR, right to use the know how granted was non exclusive whereas in case of the assessee it was exclusive. In case of G.U.J. Jaeger GmbH (Supra), the right in the know how granted was non exclusive and payment was to be made at the rate of 5% of net selling price of the product and, therefore, it was treated as royalty. In case of SNIA FIBRE SPA (Supra) the agreement for use of design, drawing and technical data was only for the period of five years though it could be further renewed. Similarly in case of All Russia Scientific Research Institute of Cable Industry, Moscow (Supra) only non exclusive right had been granted to the Indian company for use of know how for a specified period and the case was thus different. It was submitted that the Tribunal in the cases cited had not considered a vital aspect that extinguishment of any of the right in the asset even for a limited period had to be considered as transfer leading to capital gain as held by Hon'ble Supreme Court in case of AR Krishnamurthy (Supra). Therefore, the cases cited could not be considered a precedent in view of the new aspect brought on record which had not been considered. He referred to the judgment of Hon'ble Supreme Court in case of Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402 in which it has been held that a decision on a question which has not been argued could not be considered as precedent.
7. We have perused the records and considered rival contentions carefully. The dispute is regarding taxability of the amounts received by the assessee in terms of the agreement for transfer of technology, know how and trademark to German Remedies/Cadila Healthcare Ltd. The agreement had originally been entered into with German Remedies on 17.2.2003 but later on merger of German Remedies with Cadila Healthcare Ltd., a fresh agreement on the same terms and conditions was entered into with Cadila Healthcare Ltd. on 2.12.2003. In terms of the agreement the assessee company had assigned the technology, and know how consisting of technical information and the trademark to German Remedies/Cadila Healthcare Ltd in the defined territory which included India. In terms of clause 2.1 of the agreement, the technical information and trademark had been assigned for perpetual and exclusive use forever by the assignee. In so far as the trademark was concerned, clause 7.1 provided that the trademark and trade-names which were owned by the assessee shall remain the exclusive property of the assessee which means that the assignee had been given only the right to use the trademark. Further as per clause 4.1, the agreement was subject to approval by RBI and the RBI had given approval for a period of ten years from the date of agreement or for a period of seven years from the date of commencement of the production whichever came earlier. No further extension of approval by RBI has been placed on record before us. Therefore, though the agreement referred to perpetual use, the same was for the period approved by the RBI. Another important fact which needs to be taken note of is that the assessee was earlier holding 12.5% of share holding in German Remedies Ltd. and had allowed the later to use the same technology, technical know how and trademark without payment of any fees for several years. The assessee sold the shares in assessment year 2002-03 and, thereafter, it had entered into an agreement for payment of certain consideration for transfer of technology, know how and trademark for use by the assignee. The dispute is whether the payment received has to be considered towards the use of technical information and trademark or for transfer of technical information and trademark. In case, it is considered as consideration for use of technical information and trademark, even if perpetual, the payment has to be considered as royalty whereas in case the same is considered as transfer it would have the character of capital gain on transfer of property.
7.1 The capital gain arises on transfer of capital asset which has been defined in section 2(14) as property of any kind held by the assessee whether or not connected with the business or profession but does not include stock in trade, consumable stores or raw material held for the purpose of business or profession, personal effects, agricultural land and certain other specified assets. The word "property" is a word of widest amplitude and includes any asset. The technical information and trademark owned by the assessee would definitely fall in the category of capital asset. The word "transfer" has been defined in section 2(47) to include sale, exchange or relinquishment of the asset or extinguishment of any rights in the asset etc. Extinguishment of any right in the asset would amount to transfer and it is not necessary that all the rights in the assets owned by a person should be transferred. Hon'ble Supreme Court in case of Sunil Siddharthbhai (Supra) have held that expression "transfer of property" connotes the passing of the rights of the property from one person to another. It has also been held that the transfer could be of entire bundle of rights or transfer of only some of the rights. It may also mean reduction of the exclusive interest in the totality of the rights through a joint or shared interest. Hon'ble Suprme Court in case of AR Krishnamurthy(Supra) have also held that transfer u/s 2(47) meant not only permanent transfer but also temporary transfer of title in the property for any period. In that case the assessee had granted mining lease to a private company to extract clay for a period of ten years on payment of Rs. 5,00,000/- in addition to payment of royalty based on per cubic feet extracted. The issue was whether sum of Rs. 5,00,000/- could be considered as capital gain for transfer of property. It was held that rights of a owner of the land included the right to grant lease to exploit the land and, therefore, the right to grant lease was a capital asset.
7.2 Relying on the above judgments, the learned AR for the assessee has argued that the assessee had transferred its right in the technical information and trademark in the defined territory to the assignee and, therefore, even if the assessee had retained the same right in other territories, there was transfer of assets in the defined territory and, therefore, income had to be considered as capital gain. The learned AR has also referred to the para 4 of preamble of the agreement which stated that the assignor was prepared to transfer the technology, know how and trademark to the assignee for use within the defined territory. The word "assignee" it was pointed out meant transfer. Further as per clause 2.1, the assessee had assigned and transferred the technology, know how and trademark for perpetual and exclusive use forever in the territory for manufacturing of certain products. Reference has also been made to clause 6.2 as per which the assignee could license or transfer the technology and know how for any group affiliates. Considering all these clauses and judgments referred to it has been submitted that the assessee had transferred the rights in the technical information and the trademark in the defined territory to German Remedies/ Cadila Healthcare Ltd for a certain consideration which had to be considered as capital gain which is exempt under Article 13(5) of the Indo-German DTAA.
7.3 We have given careful thought to various aspects of the matter and have gone through the agreement carefully. In our view the true nature of transaction cannot be determined only on the basis of the words "transfer", "assignor", "assignee" used in the agreement but on careful consideration of the real nature of transaction after taking into account the effect of all the clauses in the agreement. In case of transfer even for a limited period the transferee should have an unfettered right to use the asset as an owner. In case there are limitations placed on transferee, the transaction could not be considered as transfer. Though clause 2.1 of the agreement provides for assignment and transfer technical information and trademark for perpetual and exclusive use forever in the territory, a careful perusal of other clauses of the agreement shows that the assessee has not been given ownership right over the technical information and trademark and there are limitations placed on exercise of such rights by the assignee. The assignee in terms of clause 2.2 cannot use or utilize the technical information or the trademark for sale of products either directly or indirectly outside the territory without prior approval of the assessee, which would be at its absolute discretion. Thus the assignee could produce only limited quantity which could be sold within the territory. Therefore, there are limits on use of technical information and trademark which could not be in case of outright sale or transfer in which case the buyer will be free to deal with the asset in the manner he likes. Further the assignee cannot license or assign or transfer the technical information and trademark to any person other than the Cadila affiliates as per clause 6.2. Therefore, the right in the technical information and the trademark is limited only to the user by the assignee and the affiliates. There is also confidential clause in Article 8.1 and 8.2 as per which the assignee cannot communicate the know how and the technical information or any other confidential information to anyone else other than the employees without the assessee's prior consent and the assignee is also required to make sure that the employees and licensees did not disclose any of the confidential information to any other person or organisation. Further as per clause 12.1 even if the assessee could license or assign the technical information/trademark to Cadila Healthcare affiliates, the latter is also bound by the terms and conditions of this agreement. In case of trademark, Article 7.1 makes it quite clear that all trademarks and trade-names shall always remain the exclusive property of the assessee in the territory. Therefore, in so far as the trademark/trade-names is concerned the assessee has not transferred the rights and has only allowed the use of it which is obvious from the agreement. As regards the technical information and know how though the right granted is exclusive and perpetual but it is only for use of the technical information and know how as pointed out earlier. Though para 4 of the preamble to the agreement referred to by the Ld. AR speaks of transfer, the said para makes it clear that the transfer is for use in the defined territory. The words "assignment" and "transfer" used in other clauses of the agreement as mentioned earlier are also for use of the technical information and the trademark. There is no clause in the agreement which speaks of transfer of right of the technical information and trademark. There are also several restrictions on the assignee in the matter of use of technology, know how and trademark which makes it quite clear that the assignee has not been given ownership rights and only right to use. In case of AR Krishnamurthy (Supra) the judgment of Hon'ble Supreme Court relied upon by the assessee, the lease right had been granted for a period of ten years but there was no restriction as to how much clay the assessee could extract nor any restriction on the manner the assessee dealt with the clay. Therefore, the said judgment is not applicable to the facts of the present case in which there are several restrictions on the assignee in the matter of use of technical information and trademark.
7.4 The case of the assessee is similar to the case of Atlas Capco AB of Sweden (Supra), the decision of Tribunal relied upon by the learned DR in which case also there was a secrecy clause as in case of the assessee and limitation on the right of the transferee in dealing with the know how and the trademark remained the exclusive property of the assessee. Considering all these factors it was held that it was only a case of use of know how and trademark and not transfer and, therefore, payment was held assessable as royalty. The said decision of Tribunal has been upheld by Hon'ble High Court of Bombay in Atlas Capco AB of Sweden (supra). In other cases cited by learned DR also, the various benches of Tribunal considering the secrecy clause and limitation on use of know how and trademark by assignee have held that it was not the case of transfer and amount has been held assessable as royalty. The learned AR has relied on judgment of Hon'ble High Court of AP in case of Koyo Seiko Co. Ltd. (Supra). In that case the assessee had received payment for supply of drawings and data in connection with certain projects. It was held that know how had been transferred in Japan. The Judgment does not show that any restriction had been placed on the Indian company for further transfer and use of data in the manner it liked. Therefore, the case is not applicable to the case of the assessee.
7.5 As regards the relinquishment of rights in the defined territory it may be mentioned that the assessee had not relinquished the rights completely even in the defined territory as the assessee exercised sufficient control in the manner of utilisation of technical information and trademark as mentioned earlier and, therefore, it could not be considered as the case of outright sale or transfer. The learned AR has also relied on decision of Delhi bench of Tribunal in case of Swadeshi Polytex Ltd. (supra). In that case payment had been made for supply of improved and modified technical know how. The issue was whether it could be considered as transfer giving rise to capital gain. The Tribunal noted that the payment was not based on user of technology because the assessee had to make the payment irrespective of whether it had used the technical know how or not and there was no provision for any refund. Further the Tribunal also noted that the assessee could share the use of technology with any other Indian company subject to sharing of the license fee with the foreign company which was not possible if the assessee was having mere right to use. It was under these circumstances that it was held that the amount had to be assessed as capital gain. The case of the assessee is however distinguishable. It is also pertinent to note here that the assessee had itself offered the payment received under the same agreement in assessment year 2003-04 as royalty which has been assessed as royalty.
8. In view of the foregoing discussion and the reasons given earlier, we are of the opinion that it was a case of payment for use of technical information and trademark and not for transfer of rights in the defined territory. Such payment for use of technical information and know how has to be considered as royalty both under the provisions of Income Tax Act and under the provisions of DTAA between India and Germany even if the payment is lump sump and not recurring. There is no dispute that the royalty under the provisions of Article 12 of DTAA between India and Germany is taxable in India. The learned AR for the assessee argued that even if the payment was considered as royalty, the same was not taxable even under Article (9)(1)(vi) of the Income Tax Act 1961. We however do not find any merit in such arguments. The royalty had been received in connection with use of technical information and trademark for the purpose of business or profession carried on in India. For the purpose of taxability of royalty in case of the non resident, it is not necessary that he should have a PE in India. Explanation to section (9)(2) inserted by Finance Act 2010 with retrospective effect from 1.6.1976 makes it quite clear that royalty u/s 9(1(vi) will be the income of the non resident whether or not the non resident has a residence or place of business or business connection in India or has rendered any services in India. Therefore, the royalty is taxable in India under section 9(1)(vi) as well as under the provisions of DTAA. We accordingly uphold the orders of CIT(A) taxing the payments as royalty in both the years.
5. In the result both the appeals of the assessee are dismissed.
SB
Regards
Prarthana Jalan
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