Sections 9(1)(vi), 195 – Outright purchase of know-how is not “royalty” under the Act
Facts:
The Taxpayer an Indian Company, engaged in the business of manufacture and sale of colour pigments and fine chemicals, purchased a particular line of business of a foreign company (NR Co) and certain payments were made towards knowhow.
The Taxpayer contended that the payments made to NR Co. were for outright purchase of capital assets.However, the Tax Authority contended that payments made by the Taxpayer were Royalty u/s. 9(1)(vi) of the Act, therefore treated the Taxpayer as assessee-in-default for failure to withhold taxes u/s. 195.
Held:
The agreement between the Taxpayer and NR Co indicates that the taxpayer had purchased knowhow, trademarks and goodwill from NR Co.
NR Co was the owner of manufacturing processes, formulae, trade secrets, technology, analytical techniques, testing procedures, processes and all documents and literature pertaining to manufacturing. NR Co sold, assigned conveyed and transferred to Taxpayer its entire right, title, interest and ownership in such rights. Thus, NR Co ceased to have right, title, interest and ownership in such rights from the date of transfer.
The Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (332 ITR 340) observed that royalty refers to transfer of “rights in respect of property” and not transfer of “right in the property”. The two transactions are distinct and have different legal effects. In the first category, the rights are purchased which enable use of those rights by the purchaser, while in the second category, no purchase is involved, only right to use has been granted.
The definition of term ‘royalty’ in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to outright purchase of right to use an asset.
Since nothing was brought on record by the tax authority to show that the payment was not for the purchase of technical knowhow, they were not in the nature of royalty.
