Resources LLC
(2009 TIOL 25 AAR IT)
Article 12(3)(a), India-USA DTAA
S. 115A(1), S. 195, Income-tax Act;
Part II, First Schedule, Finance Act, 2009
Dated : 28-10-2009
Issues :
-
Lump sum
consideration towards technology transfer amounts to royalty. Sale of
technical documentation which is incidental to grant of right to use the
know-how does not affect taxability.
-
Consideration for designs transferred on outright basis is not taxable as
royalty.
-
Tax rate
applicable for withholding is the lower rate as prescribed by S. 115A, while
the scope of chargeable amount is determined having regard to the provisions
of the treaty.
Facts :
The applicant, an American company (‘USCO’), was engaged in
the business of supplying advanced technology for the manufacture of radial
tyres. The applicant entered into an agreement with an Indian company (‘ICO’)
for grant of perpetual irrevocable right to use know-how as also transfer
ownership in respect of certain designs. The agreement specified separate
consideration for right to use know-how and for transfer of designs. The
applicant had formulated the following questions for ruling of AAR :
(i) Whether consideration paid by ICO to USCO for
transfer of documentation was taxable under the Act ?
(ii) Whether the consideration paid by ICO to USCO for
consultancy and assistance was taxable under the Act ?
(iii) If answers to (i) and (ii) were wholly or partly
against USCO, how much consideration would be taxable and at what rate ?
The applicant claimed that the agreement involved transfer
of technical documents in the form of transfer of ‘chattel’ or a ‘plant’ which
was completed outside India. The amount was therefore not taxable in India.
The AAR noted the following to be the features applicable
to the grant of right of use of know-how :
(i) USCO had expertise and know-how for enabling ICO to
set up the plant. USCO agreed to transfer perpetual, irrevocable right to
use know-how. For this purpose, know-how was defined to include all
technical information, data, specifications, methodology, methods, material
and process specifications, etc. which would enable ICO to install, operate
and maintain its plants. It also included start-up, commissioning
assistance, training, etc.
(ii) ICO was required to pay lump sum consideration to
USCO. ICO was granted non-exclusive, irrevocable, perpetual, royalty-free
right to use know-how at its factory in India and to market the products
anywhere in the world.
(iii) The term of the agreement was for 8 years which
could be mutually extended by the parties. During the term of the agreement,
USCO had to provide updates of know-how to ICO.
(iv) Know-how so transferred could be used by ICO only in
its plants including future plants but could not be sold to third parties.
(v) The agreement clarified that ownership of know-how
continued with USCO.
(vi) For a separate consideration, USCO also agreed to
provide technical assistance by sending its personnel for rendering training
and supervision services.
The Tax Department contented that the amount was
chargeable as royalty. Alternatively, the Tax Department contended that
having regard to the activities undertaken in India in excess of 100 days,
USCO was liable to tax under service PE Article of DTAA.
Held :
In respect of taxability of know-how agreement, the AAR
held :
-
The essence
of the transactions was to provide right of use of know-how. To say that the
transaction is nothing more than sale of technical documents containing
know-how is to oversimplify the issue and to ignore the plain realities. In
reality and in substance, sale of technical documentation was not the end in
itself but was mere incident of the grant of right to use know-how.
-
USCO also
agreed to provide technical assistance and advice to ensure that such
know-how is put to effective and proper use. Payment was also made
conditional upon successful completion of certain tests. It is therefore
incorrect to say that the consideration was for transfer of technical
documents sold in the USA.
-
The grant
of use of know-how is completed only after USCO provides technical
assistance and trained the personnel of ICO about use of underlying
technology. The crux and predominant features of the arrangement was that it
equipped ICO with all that was necessary to effectively put know-how to use.
Know-how which was within the exclusive use of domain was parted in favour
of ICO by grant of non-exclusive, perpetual right and by putting in place
the requisite measure to enable ICO to use and absorb know-how.
-
The payment
was ‘royalty’ within the meaning of S. 9 as also in terms of Article 12 of
the treaty as it was for making available right of use of know-how belonging
to USCO.
-
Also, the
transaction of sale was not completed in the USA. The agreement provided
that the transaction was concluded only against delivery of know-how
documents against invoices and related documents. In terms of the agreement
between the parties, delivery was to be completed at the location of ICO and
courier of documents by USCO outside India did not amount to completion of
sale.
-
The
decision of the Supreme Court in Ishikawajima Harima Heavy Industries Ltd.
(288 ITR 408) is not relevant as the contract involving transfer of
technology and know-how cannot be treated as the transaction completed
outside India. In any case, there is a sufficient territorial nexus as
technical know-how embodied in various documents is received by ICO and is
put to use in India with the assistance and advice offered by technical
personnel of USCO deputed to India.
In relation to outright transfer of designs, AAR held :
- The transaction of tread and sidewall design/ patterns (TSD) involved designs prepared and approved by ICO which USCO transferred exclusively to ICO. ICO can use such designs for self use or for selling it to third party. The agreement also confirmed that the proprietary intellectual property in design was to vest exclusively in ICO. Having regard to these features, AAR accepted the contention that the transaction involved outright transfer which was not taxable in India in absence of PE of USCO.
In relation to rate of TDS, AAR held :
- For determining tax withholding obligation of ICO, ICO can take into account favourable rate available in terms of S. 115A of the ITA. ICO therefore can deduct tax at 10% + applicable surcharge after taking into account scope of chargeable income determined having regard to the provisions of the treaty.
