THE DDIT (IT)-2(1), MUMBAI V. M/S. LYKA LABS LTD. R/A OF TREMEDIC INDUSTRIES AB, SWEDEN, MUMBAI

ITA 3705/MUM/2006

• Counselvise Citation: 370519914 RSA 2006
• Duration Of Justice: 5 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 11-09-2013
• Assessment Year: 1998-1999
• Appeal Filed On: 12-06-2006
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Double taxation relief; Permanent establishment; Capital receipt
• Section: 10; 234B

Judgement Text

LAKA LABS LTD IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI L LL L BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY, ,, , AM AM AM AM & SHRI & SHRI & SHRI & SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM ITA NO. ITA NO. ITA NO. ITA NO. 3705/MUM/2006 3705/MUM/2006 3705/MUM/2006 3705/MUM/2006 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 1998 1998 1998 1998- -- -99 9999 99) )) ) THE DY DIRECTOR OF INCOME TAX (IT) 2(1), MUMBAI VS LYKA LABS LTD 101 SHIV SHAKTI INDUSTRIAL ESTATE ANDHERI KURLA ROAD ANDHERI (E)_ MUMBAI 400 059 (APPELLANT (APPELLANT (APPELLANT (APPELLANT ) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO. DC/CIR 2(1)/T DC/CIR 2(1)/T DC/CIR 2(1)/T DC/CIR 2(1)/T- -- -33 3333 33 ASSESSEE BY NONE REVENUE BY SH JITENDRA YADAV DT.OF HEARING 24.1.2012 DT OF PRONOUNCEMENT 3 FEB 2012 ORDER ORDER ORDER ORDER PER PER PER PER VI VIVI VIJAY PAL RAO JAY PAL RAO JAY PAL RAO JAY PAL RAO, , , , JM JMJM JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 14.3.2006 OF THE CIT(A) FOR THE AY 1998-99. 2 THE REVENUE HAS RAISED THE FOLLOWING EFFECTIVE GR OUNDS IN THIS APPEAL: 1(A). ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE COMPENSATION FOR R ESTRICTIVE COVENANT IS IN THE NATURE OF CAPITAL RECEIPT THEREFORE NOT LEVIABL E TO INCOME-TAX AND COMPENSATION PURELY FOR THE SUPPLY OF TECHNICAL KNO W-HOW IS TAXABLE AS ROYALTY I FEES FOR TECHNICAL SERVICES AS PER ARTICL E 12 OF THE INDIA AND SWEDEN TAX TREATY @20% ON GROSS BASIS. 1(B) ON THE FACT AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT(A) FAILED TO APPRECIATE THAT THERE IS NO MECHAN ISM TO BIFURCATE THE TOTAL RECEIPT INTO COMPENSATION FOR RESTRICTIVE COV ENANT AND COMPENSATION FOR SUPPLY FOR TECHNICAL KNOW-HOW AND THE ENTIRE RE CEIPTS ARE TO BE TREATED AS COMPENSATION FOR TECHNICAL KNOW-HOW. 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) LAYKA LABS LTD 2 ERRED IN HOLDING THAT SINCE THERE IS NO PERMANENT E STABLISHMENT IN INDIA THERE IS NO REQUIREMENT TO DETERMINE TAXATION OF TH E APPELLANT AS PER PROVISIONS OF THE DOMESTIC TAX LAWS. WITHOUT APPREC IATING THAT THE ASSESSEE ITSELF OPTED FOR ITS TAXATION AS PER SECTI ON 1 15A OF THE L.T. ACT. 3(A). ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN HOLDING THAT NO INTEREST U/S. 234B AND 234C IS LEVIABLE IN THE CASE. 3(B). ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) FAILED TO APPRECIATE THAT M/S. LYKA LABS LTD . HAD STARTED FUNCTIONING AS A REPRESENTATIVE OF M/S. TREMEDIC INDUSTRIES AB, SWEDEN, DURING F.Y. 1997-98 AND IT HAD SIGNED ITS RETURN IN A REPRESENT ATIVE CAPACITY FOR A.Y.1997-98 AS EARLY AS ON 12/02/1998. THE APPELLANT PRAYS THAT THE ORDER OF THE LD.CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE A.O. RESTORED. 3 THIS APPEAL WAS LISTED FOR HEARING FIRST ON 9.7.2 008. NOBODY HAS EVER APPEARED ON BEHALF OF THE RESPONDENT ASSESSEE TILL DATE AND THE APPEAL IS BEING ADJOURNED ON A NUMBER OCCASIONS AS NOBODY HAS APPEA RED ON BEHALF OF THE ASSESSEE DESPITE NOTICE ISSUED. THE NOTICE ISSUED T O THE ASSESSEE RETURNED BACK UNDELIVERED BY THE POSTAL AUTHORITIES WITH THE REMA RKS LEFT. IN THESE CIRCUMSTANCES WE ARE CONVINCED THAT IT IS NOT POSSI BLE TO SERVE THE NOTICE AS THE ASSESSEE LEFT THE PLACE WITHOUT FRESH ADDRESS. AC CORDINGLY, WE PROPOSED TO HEAR AND DISPOSE OFF OF THIS APPEAL EX-PARTE. 4 WE HAVE HEARD THE LD DR AND CAREFULLY PERUSED THE RELEVANT MATERIAL ON RECORD. 5 GROUND NO.1 IS REGARDING COMPENSATION RECEIVED. 5.1 BRIEFLY STATED THE FACTS IN THIS CASE ARE THAT THE ASSESSEE, AN INDIAN COMPANY, INCORPORATED UNDER THE COMPANIES ACT, 1956 HAS OFFICE AT 77 NEHRU LAYKA LABS LTD 3 ROAD, VILE PARLE (EAST), MUMBAI. THE ASSESSEE ENTER ED INTO AN AGREEMENT DATED 4.6.1996 WITH TREMEDIC INDUSTRIES AB, A SWEDISH COM PANY WITH MAIN BUSINESS ADDRESS AT FAKTORVAGEN 13, S-43437, KUNGSBACKA, SWE DEN (HEREINAFTER REFERRED TO AS TREMEDIC) FOR GRANT OF EXCLUSIVE LICENSE IN THE RE-PUBIC OF INDIA, SRILANKA AND NEPAL (HEREINAFTER REFERRED TO AS TERRITORY) FOR USER OF THE KNOW-HOW AND TRADEMARK IN THE TERRITORY WITH A COVENANT THAT TRE MEDIC SHALL NOT DIRECTLY OR INDIRECTLY GRANT OR CONVEY TO ANY OTHER PERSON A LI CENSE TO USE THE KNOW-HOW IN THE TERRITORY DURING THE TERM OF THE AGREEMENT AND FOR SUPPLY OF CONSEQUENTIAL KNOW-HOW FOR MANUFACTURE OF ACID LACTATE GEL COMPOS ED OF LACTIC ACID, GLYCOGEN, SODIUM HYDROXIDE, PROPYLENEGLYCOL, METHYL-HYDROXYPR OPYL-CELLULOSE AND DISTILLED WATER (HEREINAFTER REFERRED TO AS PRODUCTS) AS WE LL AS TECHNICAL ASSISTANCE. AGREEMENT WAS APPROVED BY RESERVE BANK OF INDIA VID E ITS LETTER DATED 31.07.1996 BEARING NO.EC CO GITT/68112.51.00/L-69/9 6/97 (HEREINAFTER REFERRED TO AS RBI APPROVAL LETTER). 5.2 AFTER CONSIDERING THE RELEVANT PROVISIONS OF TH E AGREEMENT BETWEEN THE ASSESSEE AND TREMEDIC, THE ASSESSING OFFICER WAS OF THE OPINION THAT M/.S TREMEDIC HAS UNDERTAKEN TO TRANSFER THE TECHNICAL K NOW-HOW TO M/S LYKA LAB ON THE CONDITIONS SPECIFIED IN THE AGREEMENT WHICH IS SQUARELY COVERED UNDER ARTICLE 12 OF THE DTAA BETWEEN INDIA AND SWEDEN AS WELL AS U/S 9(1)(VI) OF THE I T ACT AND HENCE TAXABLE AS ROYALTY. 5.3 ON APPEAL, THE CIT(A) HELD THAT COMPENSATION HA S BEEN PAID FOR GRANT OF EXCLUSIVE LICENSE AND TRANSFER OF KNOW-HOW FOR MANU FACTURE OF PRODUCTS AND EXTINGUISHMENT OF SELLING RIGHT IN TERRITORY. THERE FORE, COMPENSATION FOR RESTRICTIVE COVENANT IS IN THE NATURE OF A CAPITAL RECEIPT AND NOT LEVIABLE TO INCOME TAX. THE CIT(A) HAS FURTHER HELD THAT THE C OMPENSATION PURELY FOR SUPPLY LAYKA LABS LTD 4 OF TECHNICAL KNOW HOW IS TAXABLE AS ROYALTY/FEES FO R TECHNICAL SERVICES AS PER ARTICLE 12 OF INDIAN SWEDEN TAX TREATY @ 20% ON GR OSS BASIS. SINCE THERE IS NO PERMANENT ESTABLISHMENT IN INDIA THERE IS NO REQUIR EMENT OF DETERMINE TAXATION OF THE APPELLANT AS PER PROVISIONS OF THE DOMESTIC TAX LAWS. 5.3 THE LD DR HAS SPECIFICALLY CONTENDED THAT WHEN THE PAYMENT WAS AGAINST THE TRANSFER OF TECHNICAL KNOW-HOW AND LICENSE, THE N IT IS IN THE NATURE OF ROYALTY AND AS PER THE TERMS OF AGREEMENT BETWEEN THE ASSES SEE AND TREMEDIC, THE UPPER LIMIT OF THE ROYALTY HAS BEEN SPECIFIED AND CANNOT BE EXCEED 8% OF THE TOTAL SALES IN TEN YEARS PERIOD OR 7 YEARS FROM T HE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION INCLUDING THE LUMP SUM PRICE. WHEN THE PAYMENT IS AGAINST THE TRANSFER OF TECHNICAL KNOW-HOW/LICENSE, THEN THE ENTIRE PAYMENT IS TAXABLE AS PER ARTICLE 12 OF THE TREATY AT 20% OF G ROSS BASIS. HE HAS RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 6 AFTER CONSIDERING THE CONTENTION OF THE LD DR, WE FIND THAT AS PER THE AGREEMENT, THE PAYMENT WAS AGAINST THE TRANSFER OF TECHNICAL KNOW-HOW AND LICENSE AND SUBJECT TO OUTER LIMIT OF 8% OF THE TOT AL SALES. THOUGH THE PAYMENT HAS BEEN DIVIDED INTO TWO PARTS AS LUMP SUM AS WELL AS 3% OF SALES; BUT THE TOTAL CUMULATIVE PAYMENTS SHOULD NOT EXCEED 8% OF THE SAL ES OVER THE PERIOD OF AGREEMENT. THE CIT(A) HAS ALSO NOT DISPUTED THE F ACT THAT THE PAYMENT IS IN THE NATURE OF ROYALTY; IN THE VIEW OF THE CIT(A) THE LU MP SUM IS CAPITAL IN THE NATURE NOT TAXABLE. IT IS APPROPRIATE TO SEE THE REAL ARRA NGEMENT TO DETERMINE THE NATURE OF TRANSACTION. WHEN THE PAYMENT IS AGAINST TRANSFER OF TECHNICAL KNOW- HOW AND LICENSE AND UNDISPUTEDLY, THE SAME IS IN TH E NATURE OF ROYALTY, THEN MODE OF PAYMENT OF PART AMOUNT AS LUMP SUM PAYMENT WOULD NOT CHANGE THE NATURE OF ROYALTY. IT IS NOT OUT RIGHT RESTRICTION OF BUSINESS OF TRANSFEROR BUT ONLY LAYKA LABS LTD 5 PERMIT THE ASSESSEE TO DO THE BUSINESS BY USING TEC HNICAL KNOW SUPPLIED BY THE TRANSFEROR; THEREFORE, THE MODE OF PAYMENT CANNOT CHANGE THE NATURE OF TRANSACTION. ACCORDINGLY, IN THE ABSENCE OF ANY REB UTTAL ON BEHALF OF THE ASSESSEE, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ORDER OF THE ASSESSING OFFICER ON THIS ISSUE. 7 NEXT ISSUE IS REGARDING PERMANENT ESTABLISHMENT. 7.1 THE ASSESSING OFFICER NOTED THAT DURING THE COU RSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEES REPRESENTATIVE VIDE ORD ER SHEET ENTRY DATED 29.12.2000 HAS STATED THAT THE ASSESSEE COMPANY WAN TS TO BE TAXED AS PER SECTION 115A OF THE INCOME-TAX ACT, 1961, AND NOT A S PER THE DTAA BETWEEN INDIA AND SWEDEN. THE DATE OF THE AGREEMENT IS 4TH JUNE, 1966. AS PER SECTION 115A(B)(A), IF THE ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MADE ON OR BEFORE THE 31ST DAY OF MAY, 1997, THE TAXED TO BE C HARGED IS @ 30%. HENCE, RS.14,31,000/- IS TAXED 309/A AS PER SECTION 115A OF THE INCOME-TAX ACT, AS THE SAME IS RECEIVED IN PURSUANCE OF AN AGREEMENT M ADE ON OR BEFORE 31ST MAY, 1997. 8 IT IS CLEAR FROM THE FACTS RECORDED BY THE ASSESS ING OFFICER THAT THE ASSESSEE ITSELF HAS AGREED TO PAY THE TAX U/S 115A AND NOT AS PER THE DTAA. THEREFORE, THE QUESTION OF PERMANENT ESTABLISHMENT WAS NOT AT ALL RAISED BEFORE THE ASSESSING OFFICER AND THE ASSESSEE ITSELF HAS A DMITTED THE TAX LIABILITY U/S 115A. THE CIT(A) WITHOUT DISCUSSING ANY FACTS HAS HELD IN PARA 4.1 AS UNDER: 4.1. SINCE THERE IS NO PERMANENT ESTABLISHMENT IN I NDIA THERE IS NO REQUIREMENT TO DETERMINE TAXATION OF THE APPELLANT AS PER PROVISIONS OF THE DOMESTIC TAW LAW. LAYKA LABS LTD 6 9 THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE IS NON-SPEAKING AND NO REASON HAS BEEN ASSIGNED IN SUPPORT OF THE ABOVE FI NDING; THEREFORE, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ORDER OF THE ASSESSING OFFICER, PARTICULARLY ON THE FACT THAT THE ASSESSEE ITSELF HAS OFFERED TO TAX U/S 115A. 10 THE LAST ISSUE IS REGARDING LEVY OF INTEREST U/S 234B AND 234C, WHICH IS CONSEQUENTIAL IN NATURE AND THEREFORE NO SPECIFIC FINDING IS REUQIRED. 11 IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S ALLOWED. ORDER PRONOUNCED ON THE 3 RD DAY OF FEB 2012. SD/ SD/ ( (( ( J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 3 RD FEB 2012 RAJ* RAJ* RAJ* RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI