BAYER SCHERING PHARMA AG, GERMANY.(FORMERLY KNOWN AS SCHERING AG,GERMANY), MUMBAI V. ASSTT. DIRECTOR OF INCOME TAX, MUMBAI

ITA 6628/MUM/2008

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5025 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 01-07-2013
• Assessment Year: 2005-2006
• Appeal Filed On: 14-11-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: F Y IRANI IZRFKHZ DH LS
• Keywords: Capital asset; Double taxation relief; Retrospective amendment; Advance ruling; Capital receipt
• Section: 2(14); 32

Judgement Text

BAYER PHARMA AG, GERMANY, - 1 - VK;DJ VIHYH; VF/KDJ.K ,Y U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUM BAI JH JKTSUNZ FLAG YS[KK LNL; ,OA JH FOOSD OEKZ U;KF;D LNL; DS LE{K BEFORE SHRI RAJENDRA SINGH ACCOUNTANT MEMBER AND SH RI VIVEK VARMA JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO.5465/MUM/2008 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2004-05 VK;DJ VIHY LA[;K /ITA NO.6628/MUM/2008 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2005-06 BAYER PHARMA AG, GERMANY, (FORMERLY KNOWN AS BAYER SCHERING PHARMA AG, GERMANY) C/O. SHARP & TANMAN, CHARTERED ACCOUNTANTS, RAVINDRA ANNEXE, 194 CHURCHGATE RECLAMATION, DINSHAW VACHHA ROAD, MUMBAI 400020. CUKE@ VS. DY. DIRECTOR OF INCOME TAX (INTERNATION TAXATION), RANGE 2(1), MUMBAI. PAN:- AAACS7191R VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY SHRI F.Y. IRANI IZR;FKHZ DH VKSJ LS @ RESPONDENT BY SHRI NARENDER KUMAR VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDERS DATED 10.4.2008 AND 1.8.2008 OF CIT(A) FOR THE ASSES SMENT 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 LQUOKBZ DH RKJH[K @ DATE OF HEARING 20-08-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 13-09-2013 BAYER PHARMA AG, GERMANY, - 2 - REMEDIES LTD (LATER MERGED WITH M/S CADILA HEALTHCARE LTD) FOR TRANSFER OF TECHNOLOGY, KNOW HOW AND TRADEMARK AS ROYALTY. SIN CE IDENTICAL DISPUTES HAVE BEEN RAISED IN BOTH THE APPEALS, THESE ARE BEING DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CO NVENIENCE. THE ASSESSEE SUBSEQUENTLY VIDE LETTER DATE 28.6.2013 HA S ALSO FILED ADDITIONAL GROUND TO THE EFFECT THAT THE IMPUGNED PA YMENTS ARE NOT TAXABLE EITHER UNDER THE PROVISIONS OF THE INCOME TAX ACT 1961 OR UNDER THE PROVISIONS OF DOUBLE TAXATION AVOIDANCE AGREEME NT (DTAA) BETWEEN INDIA AND GERMANY. THE ADDITIONAL GROUND BEING LEGAL GROUND AND THE FACTS RELATING THERETO BEING ALREADY ON RECORD WAS ADMI TTED BY TRIBUNAL FOR ADJUDICATION. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY, A LEADING GLOBAL PHARMACEUTICAL COMPANY AND A RESIDENT OF GERMANY, HA D 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 GE RMAN REMEDIES/CADILA HEALTHCARE LTD. IN TERMS OF THE AGREE MENT DATED 17/2/2003 FOR TRANSFER OF TECHNOLOGY KNOW HOW AND TR ADEMARK BETWEEN THE ASSESSEE COMPANY AND THE GERMAN REMEDIES LTD. M/ S GERMAN REMEDIES LTD., SUBSEQUENTLY, MERGED WITH CADILA HEAL THCARE LTD W.E.F 2.12.2003. THEREFORE, THE PAYMENTS AFTER 2.12.2003 HA VE BEEN RECEIVED FROM CADILA HEALTHCARE LTD., THOUGH THE NATURE OF PAYM ENT AND THE TERMS AND CONDITIONS OF THE AGREEMENT REMAINED THE SAM E. THE ASSESSEE IN THE RETURNS OF INCOME FILED FOR THE TWO YEARS UNDER REFERENCE HAD CLAIMED THE ABOVE SUMS AS EXEMPT TREATING THE S AME AS CAPITAL GAIN ARISING ON TRANSFER OF TECHNOLOGY, KNOW HOW AND TRADEMARK. THE ASSESSEE SUBMITTED BEFORE THE AO THAT IN TERMS O F THE DTAA BETWEEN INDIA AND GERMANY, CAPITAL GAIN ARISING FROM A LIENATION 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 BAYER PHARMA AG, GERMANY, - 3 - ONLY IN GERMANY UNDER ARTICLE 13 (5) OF DTAA BETWEEN I NDIA AND GERMANY. 2.1 THE AO, HOWEVER, DID NOT ACCEPT THE CLAIM. AFTER EXAMINATION OF RECORDS AND THE RELEVANT TERMS AND CONDITIONS OF THE A GREEMENT, THE AO NOTED THAT THE AGREEMENT HAD BEEN MADE FOR TRANSFER O F TECHNOLOGY, KNOW HOW AND TRADEMARK IN RESPECT OF CERTAIN PRODUCTS D ETAILS OF WHICH HAVE BEEN GIVEN IN PARA 4 OF THE ASSESSMENT ORDER. T HE AO NOTED THAT THE TRANSFEREE COMPANY I.E GERMAN REMEDIES HAD BEEN MANUFACTURING THE SAME PRODUCTS IN INDIA AND ALSO MARKETING THE SAM E SINCE LAST SEVERAL YEARS UNDER LICENSE. THE ASSESSEE, WHO WAS A S HARE HOLDER OF GERMAM REMEDIES HOLDING MORE THAN 12.5% OF SHARES WAS NOT CHARGING ANY FEES FROM GERMAN REMEDY. THE ASSESSEE HAD NOW SIG NED AN AGREEMENT AS PER WHICH PAYMENTS WERE MADE FOR THE TRANSF ER 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 YEA RS FROM THE DATE OF AGREEMENT OR SEVEN YEARS FROM THE DATE OF COMMERCI AL PRODUCTION WHICHEVER CAME EARLIER. AO, THEREFORE, PROCEEDED TO EXA MINE THE NATURE OF PAYMENT I.E. WHETHER IT SHOULD BE CONSIDERED AS ROY ALTY 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 IND IA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURC E IN INDIA. THE ROYALTY HAD BEEN DEFINED IN THE EXPLANATION 2 OF SEC TION 9(1)(VI) AS UNDER:- BAYER PHARMA AG, GERMANY, - 4 - EXPLANATION 2 - FOR THE PURPOSES OF THIS CLAUSE, R OYALTY MEANS CONSIDERATION ( INCLUDING ANY LUMP SUM CONSIDERATI ON BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECI PIENT CHARGEABLE UNDER THE HEAD CAPITAL GAINS FOR- (I) THE TRANSFER OF ALL OR ANY RIGHTS ( INCLUDING T HE GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERT Y; (II) THE IMPARTING OF ANY INFORMATION CONCERNING T HE WORKING OF, OR THE USE OF, A PATENT INVENTION MODEL, DESIGN, SECRE T FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; (III) THE USE OF ANY PATENT, INVENTION, MODEL, DES IGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TE CHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR S KILL; (IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMM ERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB;] (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ART ISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONN ECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADI O BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTR IBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS; OR BAYER PHARMA AG, GERMANY, - 5 - (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WI TH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO [(IV), (IVA) AND ] (V). 2.3 AO OBSERVED THAT THE DEFINITION OF ROYALTY GIVE N 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 A ND GERMANY IN WHICH THE TERM ROYALTIE HAS BEEN DEFINED AS UNDER:- THE TERM ROYALTY AS USED IN THIS ARTICLE MEANS PA YMENTS 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 CI NEMATOGRAPH FILMS OR FILMS OR TAPES USED FOR RADIO OR TELEVISION BROADCASTING, AN Y PATENT, TRADEMARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR T HE 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 RO YALTY AS PER THE DTAA BETWEEN INDIA AND GERMANY CLEARLY MENTIONED THA T 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 A S ROYALTY WHICH WAS TAXABLE UNDER ARTICLE 12 OF THE DTAA BETWEEN INDI A 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 THE RE SHOULD BE ONLY RECURRING PAYMENTS FOR THE SAME TO BE CONSIDERED AS ROY ALTY. AO FURTHER OBSERVED THAT THE ASSESSEE IN ASSESSMENT YEAR 2003-0 4 IN WHICH PART OF THE PAYMENT UNDER THE SAME AGREEMENT HAD BEEN RECEIVE D, HAD OFFERED THE PAYMENT AS ROYALTY UNDER ARTICLE 12 OF THE DTAA BE TWEEN INDIA AND GERMANY. AO, THEREFORE, CONCLUDED THAT THE ASSESSEE HA D RECEIVED LUMP BAYER PHARMA AG, GERMANY, - 6 - SUMP PAYMENT AS CONSIDERATION FOR PAST USE AS WELL AS FOR FUTURE USE OF THE TECHNOLOGY, KNOW HOW AND TRADEMARK WHICH WAS NOT HING 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 SUB MITTED BEFORE CIT(A) THAT THE CONCLUSION DRAWN BY AO THAT THE PAYM ENTS RECEIVED BY ASSESSEE WERE TAXABLE AS ROYALTY WAS NOT CORRECT. TH E ASSESSEE ARGUED THAT THE NATURE OF PAYMENT WAS REQUIRED TO BE EXAMINED IN TERMS OF THE VARIOUS CLAUSES OF THE AGREEMENT. THE ASSESSEE REFERRE D TO PARA 4 OF THE PREAMBLE OF THE AGREEMENT WHICH STATED THAT THE ASSIG NOR 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. THEREF ORE, THE AGREEMENT WAS CLEARLY FOR TRANSFER OF TECHNOLOGY, KNOW H OW AND TRADEMARK. FURTHER ARTICLE 2.1 OF THE AGREEMENT CLEARLY MENTIONED THAT THE ASSESSEE SHALL ASSIGN AND TRANSFER THE TECHNOLOG Y, 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 IRREVERSI BLE TRANSFER. FURTHER AS PER ARTICLE 2.4 NEITHER THE ASSIGNOR NOR THE ASSIGNEE WAS UNDER ANY OBLIGATION TO TRANSFER AND ASSIGN ANY IMPRO VEMENT MADE TO THE TECHNICAL INFORMATION WHICH SHOWED THAT THE ASS IGNEE WAS THE OWNER OF THE TECHNICAL INFORMATION. FURTHER AS PER ART ICLE 2.6, THE ASSESSEE WAS ENTITLED TO REGISTER THE PRODUCTS IN TH E TERRITORY IN ITS OWN NAME. ARTICLE 6.2 ALSO PROVIDES THAT THE ASSIGNEE COU LD LICENSE OR ASSIGN OR TRANSFER THE TECHNOLOGY AND KNOW HOW OR THE TECHNIC AL 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 TECH NOLOGY, KNOW HOW BAYER PHARMA AG, GERMANY, - 7 - AND TRADEMARK. REFERRING TO THE RBI APPROVAL, IT WAS P OINTED THAT THE APPROVAL ONLY MENTIONED LUMP SUMP PAYMENT FOR THE U SE OF TRADEMARK AND TECHNOLOGY KNOW HOW AND THERE WAS NOTHING MENTI ONED IN THE APPROVAL ABOUT ROYALTY PAYMENT. THE ASSESSEE FURTHER SUBMITTED THAT THE WORD PROPERTY AS DEFINED IN SECTION 2(14) WAS T HE WORD OF WIDEST AMPLITUDE AND INCLUDED ANY RIGHT IN THE PROPERTY. FURTH ER SECTION 32 W.E.F ASSESSMENT YEAR 1999-2000 RECOGNIZED TECHNICAL , KNOW HOW AND TRADEMARK AS AN INTANGIBLE ASSET ON WHICH DEPRECIATI ON WAS ALLOWABLE. THEREFORE, THE TECHNICAL, KNOW HOW AND TRADEMARK WHIC H ARE CLEARLY COVERED BY THE DEFINITION OF PROPERTY HAVE BEEN TRANS FERRED IN THIS CASE FOR PERPETUAL USE BY THE ASSIGNEE FOR CERTAIN CONSID ERATION. THEREFORE, IT WAS A CASE OF CAPITAL GAIN ON TRANSFER OF PROPERTY WH ICH WAS COVERED BY THE ARTICLE 13.5 OF THE DTAA BETWEEN INDIA AND GERMA NY AND WAS TAXABLE ONLY IN THE COUNTRY OF RESIDENCE I.E. GERMA NY. 4. CIT(A), HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED BY THE ASSESSEE. HE REFERRED TO THE ARTICLE 2.2 OF THE AGREEMEN T AS PER WHICH THE ASSIGNEE COULD NOT USE OR UTILIZE THE TECHNOLOG Y, KNOW HOW OR TECHNICAL INFORMATION OR THE TRADEMARKS FOR SALE OF PRO DUCTS 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 LI CENSE OR ASSIGN OR TRANSFER THE TECHNOLOGY, KNOW HOW AND TECHNICAL INFO RMATION OR TRADEMARK TO ANY PERSON WHO IS NOT A CADILA AFFILIAT E. 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 S HALL NOT COMMUNICATE OR OTHERWISE RELEASE ANY KNOW HOW OR TECHNICAL INFORM ATION AND ANY OTHER CONFIDENTIAL INFORMATION TO ANY ONE ELSE OTHER T HAN ASSIGNEES EMPLOYEES WITHOUT THE ASSIGNORS PRIOR WRITTEN CONSE NT. FURTHER AS PER ARTICLE 8.2 THE ASSIGNEE WAS REQUIRED TO MAKE SURE TH AT ITS EMPLOYEES AND LICENCEES DID NOT DISCLOSE ANY OF THE CONFIDENT IAL INFORMATION TO ANY BAYER PHARMA AG, GERMANY, - 8 - OTHER PERSON OR ORGANISATION. ARTICLE 12.1 PROVIDED TH AT THE TECHNOLOGY, KNOW HOW ETC COULD BE TRANSFERRED TO THE CADILA AFFIL IATES IN ACCORDANCE WITH THE AGREEMENT SO LONG AS CADILA AFFILIATE WAS B OUND 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, TH E RBI APPROVAL WAS FOR A PERIOD OF TEN YEARS FROM THE DATE OF AGREEMENT O R FOR SEVEN YEARS FROM THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION WHICHEVER WAS EARLIER. THE AGREEMENT BETWEEN THE TWO PARTIES WA S SUBJECT TO APPROVAL OF RBI WHO HAD GIVEN APPROVAL ONLY FOR A LI MITED PERIOD. THEREFORE, IT COULD NOT BE SAID THAT THE AGREEMENT WA S 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 TECHNOLO GY, KNOW HOW AND TRADEMARK WHICH HAD ONLY BEEN ASSIGNED TO GERMAN REM EDIES/CADILA HEALTHCARE LTD FOR USE. THEREFORE, EVEN IF THE USE WAS FOR AN INDEFINITE PERIOD, IT HAD TO BE CONSIDERED ONLY AS ROYALTY AND NO T AS CAPITAL GAIN ON TRANSFER OF PROPERTY. CIT(A) REFERRED TO SEVERAL DECISIO NS OF TRIBUNAL IN WHICH UNDER SIMILAR SITUATIONS THE PAYMENTS HAVE BEEN HELD TO BE ASSESSABLE AS ROYALTY AND NOT CAPITAL GAIN. THESE DE CISIONS OF THE TRIBUNAL ARE MENTIONED BELOW:- (I) 37 ITD 64 (MUM) IN CASE OF JAEGER GMBH VS. ITO (II) 30 ITD 329 (MUM) IN CASE OF FIRST ITO VS. AUTOMOBIL E PENGGEOT (III) 53 ITD 293 (MUM) IN CASE OF ATLAS CAPCO AB OF SWEDE N VS. DCIT (IV) 98 ITD 69 (MUM) IN CASE OF DCIT VS. ALL RUSSIA SCIE NTIFIC RESEARCH INSTITUTE OF CABLE INDUSTRY. (V) 55 TTJ 554 (DEL) IN CASE OF ACIT VS. SNIA FIBRE SP A BAYER PHARMA AG, GERMANY, - 9 - 4.1 CIT(A), THEREFORE, HELD THAT THE PAYMENT WAS TAX ABLE AS ROYALTY IN INDIA. HE ACCORDINGLY UPHELD THE ORDER OF AO, AGGRIEV ED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 4.2 BEFORE US, LEARNED AR FOR THE ASSESSEE REITERATED T HE SUBMISSIONS MADE BEFORE LOWER AUTHORITIES THAT THE ASSESSEE HAD A SSIGNED THE TECHNICAL KNOW HOW ETC TO GERMAN REMEDIES/CADILA HE ALTHCARE LTD. WHICH MEANT TRANSFER OF RIGHT OF THE ASSESSEE IN THE P ROPERTY. IT WAS POINTED OUT THAT THE AGREEMENT CLEARLY REFERRED THE ASSE SSEE 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 AVAIL ABLE ONLY IN CASE OF OWNER. HE REFERRED TO THE DEFINITION OF THE WORD TRAN SFER IN SECTION 2(47) WHICH MEANT SALE, EXCHANGE, RELINQUISHMENT OF ASSET OR EXTINGUISHMENT OF ANY RIGHT THEREIN. THUS, IT WAS ARGU ED, THAT IF ANY OF THE RIGHTS HELD BY THE ASSESSEE IN THE ASSET IS ASSI GNED, IT AMOUNTED TRANSFER. THE LEARNED AR ALSO REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF SUNIL SIDDHARTHBHAI VS. CIT ( 156 ITR 509) IN WHICH IT WAS HELD THAT TRANSFER OF PROPERTY MAY INVOLV E TRANSFER OF ENTIRE BUNDLE OF RIGHTS OR TRANSFER OF ONLY SOME OF THE RIG HTS. IT COULD ALSO INVOLVE REDUCTION OF THE EXCLUSIVE INTEREST OF A PE RSON IN THE TOTALITY OF THE RIGHTS THROUGH A JOINT OR SHARED INTEREST. THE AS SESSEE IN THIS CASE HAD RIGHTS OVER THE TECHNOLOGY, KNOW HOW, TRADEMARK ET C WHICH HAD BEEN TRANSFERRED TO THE ASSIGNEE IN A PARTICULAR TERRITO RY. 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 T O TRANSFER OF CAPITAL ASSET. BAYER PHARMA AG, GERMANY, - 10 - 4.2 HE ALSO REFERRED TO THE JUDGMENT OF HONBLE SUPRE ME COURT IN CASE OF AR KRISHNAMURTHY AND ANOTHER VS. CIT ( 176 ITR 417) 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 HONBLE 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. VS. CIT (27 ITR 341) IN WHICH IT WAS HELD THAT TRANSFER MEANT NOT ONLY PERMANENT TR ANSFER BUT ALSO TEMPORARY TRANSFER OF TITLE IN THE PROPERTY FOR ANY PER IOD. THE VIEW TAKEN BY THE HONBLE HIGH COURT OF PATNA HAD BEEN AFFFIRMED BY THE SUPREME COURT IN CASE OF R.K. PALSHIKAR (HUF) (172 ITR 311). 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 T ERMINATED. 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 T RANSFER IN THE LIGHT OF AFORESAID JUDGMENTS. THE LEARNED AR ALSO PLACED RELIAN CE THE JUDGMENT OF HONBLE HIGH COURT OF AP IN CASE OF CIT VS. KOYO SEIKO CO. LTD. (233 ITR 421) 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 EXCLUSI VE KNOWLEDGE PART OF WHICH WAS LOST IN INDIA. THEREFORE, THE AMOUNT RECEIVED WAS A CAPITAL RECEIPT. REFERENCE WAS ALSO MADE TO THE DEC ISION OF DELHI BENCH OF TRIBUNAL IN CASE OF SWADESHI POLYTEX LTD. VS INCO ME-TAX OFFICER ( 38 ITD 328) IN WHICH THE PAYMENT RECEIVED FOR SUPPLY OF TECHNICAL, KNOW HOW HAD BEEN HELD ASSESSABLE AS CAPITAL GAIN AND NO T ROYALTY. IT WAS THUS ARGUED THAT AMOUNTS RECEIVED BY THE ASSESSEE IN THIS CASE WERE FOR TRANSFER OF TECHNOLOGY, KNOW HOW AND TECHNICAL INFORM ATION WHICH WAS BAYER PHARMA AG, GERMANY, - 11 - ASSESSABLE AS CAPITAL GAIN. THE TRANSFER HAD TAKEN P LACE IN GERMANY WHICH WAS CLEAR FROM ARTICLE 16 OF THE AGREEMENT. THE REFORE, UNDER ARTICLE 13.5 OF DTAA THE AMOUNT WAS TAXABLE ONLY IN GERMANY. 4.3 THE LEARNED AR ALSO SUBMITTED THAT THE AMOUNT W AS NOT ASSESSABLE AS ROYALTY EVEN UNDER THE PROVISIONS OF DO MESTIC ACT. REFERRING TO THE DEFINITION OF ROYALTY UNDER EXPLANA TION 2 TO SECTION 9(1)(VI) IT WAS SUBMITTED THAT THOUGH THE DEFINITIO N 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 EXPLICI TLY EXCLUDED ANY CONSIDERATION WHICH WOULD BE THE INCOME OF THE RECIPI ENT CHARGEABLE UNDER THE HEAD CAPITAL GAIN. THEREFORE, ONCE THE SU M WAS FOUND CHARGEABLE AS CAPITAL GAIN, IT WILL BE OUT OF THE PU RVIEW OF TERM ROYALTY EVEN UNDER THE INCOME TAX ACT. AS REGARDS THE ROYAL TY 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 A CCORDINGLY URGED THAT THE CLAIM OF THE ASSESSEE TO EXEMPT THE PAYMEN TS AS CAPITAL GAIN SHOULD BE ACCEPTED. 5. LEARNED CIT (DR) ON THE OTHER HAND STRONGLY DEFEND ED THE ORDERS OF AUTHORITIES BELOW. HE REFERRED TO THE VARIOUS ARTICL ES OF THE AGREEMENT ALREADY DISCUSSED BY CIT(A) TO POINT OUT THAT CUMULA TIVE 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 T RANSFER OF ASSET. HE ALSO REFERRED TO THE VARIOUS DECISIONS OF TRIBUNAL RELI ED UPON BY CIT(A) TO POINT OUT THAT THE CASE OF THE ASSESSEE WAS SIMI LAR TO THOSE CASES IN WHICH IT HAS BEEN HELD THAT SUCH PAYMENTS ARE TAXABL E AS ROYALTY. IN ADDITION LEARNED DR ALSO REFERRED TO THE JUDGMENT OF A UTHORITY FOR BAYER PHARMA AG, GERMANY, - 12 - ADVANCE RULING IN CASE OF INTERNATIONAL BAYER ENGINE ERING RESOURCES LLC ( 319 ITR 228) 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 VS. DCIT (53 ITD 293) WHICH RELATED TO SUPPLY OF TECHNOLOGY, KNOW HOW AND TRADEMARK FOR MANUFACTURING OF SCREW TYPE AIR CONDITIONERS. IT WAS P OINTED OUT THAT IN THAT CASE ALSO THERE WERE SIMILAR CLAUSES LIKE SECRECY CLAUSE AND LIMITATION ON THE RIGHT OF THE ASSIGNEE IN DEALING W ITH THE KNOW HOW AND EVEN AFTER CONSIDERING THESE FACTORS, THE TRIBUNAL HE LD 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 HONBLE HIGH COU RT OF BOMBAY AS REPORTED IN 18 TAXMANN. COM 159. 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 N OT 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 O F SWEDEN VS. DCIT (SUPRA) RELIED UPON BY THE LEARNED DR, THE AGREEMENT WA S NOT PERPETUAL BUT ONLY FOR A PERIOD OF 5 YEARS THOUGH IT COULD BE F URTHER RENEWED AS PER THE AGREEMENT. EITHER PARTY COULD TERMINATE THE AGREE MENT ON HAPPENING OF CERTAIN EVENTS, WHICH WAS NOT SO IN THE PRESENT CASE. IN THE CASE OF INTERNATIONAL TIRES ENGINEERING RESOURCES LLC (SUPRA) REFERRED TO BY LEARNED DR, RIGHT TO USE THE KNOW HOW GRAN TED WAS NON EXCLUSIVE WHEREAS IN CASE OF THE ASSESSEE IT WAS EXC LUSIVE. IN CASE OF BAYER PHARMA AG, GERMANY, - 13 - JAEGER GMBH VS. ITO (SUPRA), THE RIGHT IN THE KNOW HOW GRANTED WAS NON EXCLUSIVE AND PAYMENT WAS TO BE MADE AT THE RAT E OF 5% OF NET SELLING PRICE OF THE PRODUCT AND, THEREFORE, IT WAS TREATED AS ROYALTY. IN CASE OF ACIT VS. SNIA FIBRE SPA (SUPRA) THE AGRE EMENT 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 DCIT VS. ALL RUSSIA SCIENTIFIC RESEARCH INSTITUTE OF CAB LE INDUSTRY (SUPRA) ONLY NON EXCLUSIVE RIGHT HAD BEEN GRANTED TO THE IN DIAN COMPANY FOR USE OF KNOW HOW FOR A SPECIFIED PERIOD AND THE CASE WAS THUS DIFFERENT. IT WAS SUBMITTED THAT THE TRIBUNAL IN TH E 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 CONSID ERED AS TRANSFER LEADING TO CAPITAL GAIN AS HELD BY HONBLE SUPREME COURT IN CASE OF AR KRISHNAMURTHY AND ANOTHER (SUPRA). THEREFORE, THE CASES CITED COULD NOT BE CONSIDERED A PRECEDENT IN VIEW OF THE NEW ASPE CT BROUGHT ON RECORD WHICH HAD NOT BEEN CONSIDERED. HE REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF GOODYEAR INDIA LTD. VS. STATE OF BANK OF INDIA OF HARYANA AND ANOTHER (188 ITR 402) IN WHI CH IT HAS BEEN HELD THAT A DECISION ON A QUESTION WHICH HAS NOT BE EN ARGUED COULD NOT BE CONSIDERED AS PRECEDENT. 7. WE HAVE PERUSED THE RECORDS AND CONSIDERED RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TAXABILITY OF T HE AMOUNTS RECEIVED BY THE ASSESSEE IN TERMS OF THE AGREEMENT FOR TRANSFER OF TECHNOLOGY, KNOW HOW AND TRADEMARK TO GERMAN REMEDIES/CADILA HEALTHC ARE LTD. THE AGREEMENT HAD ORIGINALLY BEEN ENTERED INTO WITH GER MAN REMEDIES ON 17.2.2003 BUT LATER ON MERGER OF GERMAN REMEDIES W ITH CADILA HEALTHCARE LTD., A FRESH AGREEMENT ON THE SAME TERM S AND CONDITIONS WAS ENTERED INTO WITH CADILA HEALTHCARE LTD. ON 2.12.20 03. IN TERMS OF THE AGREEMENT THE ASSESSEE COMPANY HAD ASSIGNED THE TEC HNOLOGY, AND KNOW HOW CONSISTING OF TECHNICAL INFORMATION AND THE TRA DEMARK TO GERMAN BAYER PHARMA AG, GERMANY, - 14 - REMEDIES/CADILA HEALTHCARE LTD IN THE DEFINED TERRI TORY WHICH INCLUDED INDIA. IN TERMS OF CLAUSE 2.1 OF THE AGREEMENT, THE TECHNICAL INFORMATION AND TRADEMARK HAD BEEN ASSIGNED FOR PERPETUAL AND E XCLUSIVE USE FOREVER BY THE ASSIGNEE. IN SO FAR AS THE TRADEMARK WAS CON CERNED, CLAUSE 7.1 PROVIDED THAT THE TRADEMARK AND TRADE-NAMES WHICH W ERE 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 SUBJEC T 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 D ATE OF COMMENCEMENT OF THE PRODUCTION WHICHEVER CAME EARLIER. NO FURTHER E XTENSION OF APPROVAL BY RBI HAS BEEN PLACED ON RECORD BEFORE US. THEREFORE, THOUGH THE AGREEMENT REFERRED TO PERPETUAL USE, THE SAME WAS FOR THE PER IOD 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 TEC HNOLOGY, TECHNICAL KNOW HOW AND TRADEMARK WITHOUT PAYMENT OF ANY FEES FOR S EVERAL YEARS. THE ASSESSEE SOLD THE SHARES IN ASSESSMENT YEAR 2002-03 AND, THEREAFTER, IT HAD ENTERED INTO AN AGREEMENT FOR PAYMENT OF CERTAI N 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 F OR TRANSFER OF TECHNICAL INFORMATION AND TRADEMARK. IN CASE, IT IS CONSIDERE D 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 GAI N 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 HE LD BY THE ASSESSEE WHETHER OR NOT CONNECTED WITH THE BUSINESS OR PROF ESSION BUT DOES NOT INCLUDE STOCK IN TRADE, CONSUMABLE STORES OR RAW MA TERIAL 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 BAYER PHARMA AG, GERMANY, - 15 - AMPLITUDE AND INCLUDES ANY ASSET. THE TECHNICAL INF ORMATION AND TRADEMARK OWNED BY THE ASSESSEE WOULD DEFINITELY FA LL IN THE CATEGORY OF CAPITAL ASSET. THE WORD TRANSFER HAS BEEN DEFINED IN SECTION 2(47) TO INCLUDE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASS ET 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. HONBLE SU PREME COURT IN CASE OF SUNIL SIDDHARTHBHAI VS. CIT (SUPRA) HAVE HELD TH AT 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 TH E RIGHTS. IT MAY ALSO MEAN REDUCTION OF THE EXCLUSIVE INTEREST IN THE TOTA LITY OF THE RIGHTS THROUGH A JOINT OR SHARED INTEREST. HONBLE SUPRME C OURT IN CASE OF AR KRISHNAMURTHY VS. CIT(A) (SUPRA) HAVE ALSO HELD THAT T RANSFER 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 ASSES SEE HAD GRANTED MINING LEASE TO A PRIVATE COMPANY TO EXTRACT CLAY FO R A PERIOD OF TEN YEARS ON PAYMENT OF RS. 5,00,000/- IN ADDITION TO PA YMENT OF ROYALTY BASED ON PER CUBIC FEET EXTRACTED. THE ISSUE WAS WHET HER SUM OF RS. 5,00,000/- COULD BE CONSIDERED AS CAPITAL GAIN FOR TRA NSFER OF PROPERTY. IT WAS HELD THAT RIGHTS OF A OWNER OF THE LAND INCLU DED 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 F OR 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 DEFI NED TERRITORY AND, THEREFORE, INCOME HAD TO BE CONSIDERED AS CAPITAL GAI N. THE LEARNED AR HAS ALSO REFERRED TO THE PARA 4 OF PREAMBLE OF THE AG REEMENT WHICH STATED THAT THE ASSIGNOR WAS PREPARED TO TRANSFER THE TECHNOLOGY, KNOW BAYER PHARMA AG, GERMANY, - 16 - HOW AND TRADEMARK TO THE ASSIGNEE FOR USE WITHIN THE D EFINED TERRITORY. THE WORD ASSIGNEE IT WAS POINTED OUT MEANT TRANSFE R. 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. REFEREN CE HAS ALSO BEEN MADE TO CLAUSE 6.2 AS PER WHICH THE ASSIGNEE COULD L ICENSE OR TRANSFER THE TECHNOLOGY AND KNOW HOW FOR ANY GROUP AFFILIATES. CONSIDERING ALL THESE CLAUSES AND JUDGMENTS REFERRED TO IT HAS BEEN S UBMITTED THAT THE ASSESSEE HAD TRANSFERRED THE RIGHTS IN THE TECHNICAL I NFORMATION AND THE TRADEMARK IN THE DEFINED TERRITORY TO GERMAN REMEDIES/ CADILA HEALTHCARE LTD FOR A CERTAIN CONSIDERATION WHICH HAD T O BE CONSIDERED AS CAPITAL GAIN WHICH IS EXEMPT UNDER ARTICLE 13(5) O F 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 O UR VIEW THE TRUE NATURE OF TRANSACTION CANNOT BE DETERMINED ONLY ON THE BASIS OF THE WORDS TRANSFER, ASSIGNOR, ASSIGNEE USED IN THE A GREEMENT BUT ON CAREFUL CONSIDERATION OF THE REAL NATURE OF TRANSACTION AFTER TAKING INTO ACCOUNT THE EFFECT OF ALL THE CLAUSES IN THE AGREEM ENT. 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 LIMI TATIONS PLACED ON TRANSFEREE, THE TRANSACTION COULD NOT BE CONSIDERED A S TRANSFER. THOUGH CLAUSE 2.1 OF THE AGREEMENT PROVIDES FOR ASSIGNMENT AN D TRANSFER TECHNICAL INFORMATION AND TRADEMARK FOR PERPETUAL AND EXCLUSIVE USE FOREVER IN THE TERRITORY, A CAREFUL PERUSAL OF OTHER C LAUSES 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. TH E ASSIGNEE IN TERMS OF CLAUSE 2.2 CANNOT USE OR UTILIZE THE TECHNICAL I NFORMATION OR THE TRADEMARK FOR SALE OF PRODUCTS EITHER DIRECTLY OR IN DIRECTLY OUTSIDE THE BAYER PHARMA AG, GERMANY, - 17 - TERRITORY WITHOUT PRIOR APPROVAL OF THE ASSESSEE, WHI CH WOULD BE AT ITS ABSOLUTE DISCRETION. THUS THE ASSIGNEE COULD PRODUCE ONLY LIMITED QUANTITY WHICH COULD BE SOLD WITHIN THE TERRITORY. T HEREFORE, THERE ARE LIMITS ON USE OF TECHNICAL INFORMATION AND TRADEMARK W HICH 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 INF ORMATION AND TRADEMARK TO ANY PERSON OTHER THAN THE CADILA AFFILI ATES 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 I NFORMATION OR ANY OTHER CONFIDENTIAL INFORMATION TO ANYONE ELSE OT HER THAN THE EMPLOYEES WITHOUT THE ASSESSEES PRIOR CONSENT AND T HE ASSIGNEE IS ALSO REQUIRED TO MAKE SURE THAT THE EMPLOYEES AND LICENSE ES DID NOT DISCLOSE ANY OF THE CONFIDENTIAL INFORMATION TO ANY OTHER PERSO N OR ORGANISATION. FURTHER AS PER CLAUSE 12.1 EVEN IF THE ASSESSEE COUL D LICENSE OR ASSIGN THE TECHNICAL INFORMATION/TRADEMARK TO CADILA HEALTH CARE 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 T HAT ALL TRADEMARKS AND TRADE-NAMES SHALL ALWAYS REMAIN THE EXCLUSIVE PRO PERTY 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 TH E AGREEMENT. AS REGARDS THE TECHNICAL INFORMATION AND KNOW HOW THOUGH THE RIGHT GRANTED IS EXCLUSIVE AND PERPETUAL BUT IT IS ONLY FO R USE OF THE TECHNICAL INFORMATION AND KNOW HOW AS POINTED OUT EARLIER. TH OUGH PARA 4 OF THE PREAMBLE TO THE AGREEMENT REFERRED TO BY THE LD. AR SP EAKS OF TRANSFER, THE SAID PARA MAKES IT CLEAR THAT THE TRANSFER IS FOR US E IN THE DEFINED TERRITORY. THE WORDS ASSIGNMENT AND TRANSFER USED IN OTHER CLAUSES OF THE AGREEMENT AS MENTIONED EARLIER ARE ALSO FOR USE O F THE TECHNICAL BAYER PHARMA AG, GERMANY, - 18 - INFORMATION AND THE TRADEMARK. THERE IS NO CLAUSE IN THE AGREEMENT WHICH SPEAKS OF TRANSFER OF RIGHT OF THE TECHNICAL IN FORMATION AND TRADEMARK. THERE ARE ALSO SEVERAL RESTRICTIONS ON THE ASSIGNEE IN THE MATTER OF USE OF TECHNOLOGY, KNOW HOW AND TRADEMARK W HICH MAKES IT QUITE CLEAR THAT THE ASSIGNEE HAS NOT BEEN GIVEN OW NERSHIP RIGHTS AND ONLY RIGHT TO USE. IN CASE OF AR KRISHNAMURTHY VS. CIT (SUPRA) THE JUDGMENT OF HONBLE SUPREME COURT RELIED UPON BY THE A SSESSEE, THE LEASE RIGHT HAD BEEN GRANTED FOR A PERIOD OF TEN YE ARS BUT THERE WAS NO RESTRICTION AS TO HOW MUCH CLAY THE ASSESSEE COULD E XTRACT 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 VS. DCIT(SUPRA), THE DECISION OF TRIBUNAL RE LIED UPON BY THE LEARNED DR IN WHICH CASE ALSO THERE WAS A SECRECY CLA USE AS IN CASE OF THE ASSESSEE AND LIMITATION ON THE RIGHT OF THE TRAN SFEREE IN DEALING WITH THE KNOW HOW AND THE TRADEMARK REMAINED THE EXCLUSIVE PROPERTY OF THE ASSESSEE. CONSIDERING ALL THESE FACTORS IT WAS HELD T HAT IT WAS ONLY A CASE OF USE OF KNOW HOW AND TRADEMARK AND NOT TRANS FER AND, THEREFORE, PAYMENT WAS HELD ASSESSABLE AS ROYALTY. THE SAID DEC ISION OF TRIBUNAL HAS BEEN UPHELD BY HONBLE HIGH COURT OF BOMBAY (18 . TAXMANN. COM 159). IN OTHER CASES CITED BY LEARNED DR ALSO, THE V ARIOUS BENCHES OF TRIBUNAL CONSIDERING THE SECRECY CLAUSE AND LIMITATIO N 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 ROYAL TY. THE LEARNED AR HAS RELIED ON JUDGMENT OF HONBLE HIGH COURT OF A P IN CASE OF KOYO SEIKO CO. LTD. (SUPRA). IN THAT CASE THE ASSESSEE HA D RECEIVED PAYMENT FOR SUPPLY OF DRAWINGS AND DATA IN CONNECTION WITH C ERTAIN PROJECTS. IT WAS HELD THAT KNOW HOW HAD BEEN TRANSFERRED IN JAPAN . THE JUDGMENT BAYER PHARMA AG, GERMANY, - 19 - DOES NOT SHOW THAT ANY RESTRICTION HAD BEEN PLACED O N 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 DEF INED TERRITORY IT MAY BE MENTIONED THAT THE ASSESSEE HAD NOT RELINQUIS HED THE RIGHTS COMPLETELY EVEN IN THE DEFINED TERRITORY AS THE ASSE SSEE EXERCISED SUFFICIENT CONTROL IN THE MANNER OF UTILISATION OF T ECHNICAL INFORMATION AND TRADEMARK AS MENTIONED EARLIER AND, THEREFORE, IT COU LD NOT BE CONSIDERED AS THE CASE OF OUTRIGHT SALE OR TRANSFER. TH E LEARNED AR HAS ALSO RELIED ON DECISION OF DELHI BENCH OF TRIBUNAL I N CASE OF SWADESHI POLYTEX LTD. VS INCOME-TAX OFFICER ( 38 ITD 328). IN THAT CASE PAYMENT HAD BEEN MADE FOR SUPPLY OF IMPROVED AND MODIFIED T ECHNICAL KNOW HOW. THE ISSUE WAS WHETHER IT COULD BE CONSIDERED A S TRANSFER GIVING RISE TO CAPITAL GAIN. THE TRIBUNAL NOTED THAT THE PA YMENT WAS NOT BASED ON USER OF TECHNOLOGY BECAUSE THE ASSESSEE HAD TO MA KE THE PAYMENT IRRESPECTIVE OF WHETHER IT HAD USED THE TECHNICAL KNOW HOW OR NOT AND THERE WAS NO PROVISION FOR ANY REFUND. FURTHER THE TRIBUN AL ALSO NOTED THAT THE ASSESSEE COULD SHARE THE USE OF TECHNOLOGY WITH ANY OTHER INDIAN COMPANY SUBJECT TO SHARING OF THE LICENSE FE E WITH THE FOREIGN COMPANY WHICH WAS NOT POSSIBLE IF THE ASSESSEE WAS HAVING MERE RIGHT TO USE. IT WAS UNDER THESE CIRCUMSTANCES THAT IT WA S 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 UNDE R THE SAME AGREEMENT IN ASSESSMENT YEAR 2003-04 AS ROYALTY WHIC H HAS BEEN ASSESSED AS ROYALTY. 8. IN VIEW OF THE FOREGOING DISCUSSION AND THE REAS ONS GIVEN EARLIER, WE ARE OF THE OPINION THAT IT WAS A CASE OF PAYMENT FO R USE OF TECHNICAL INFORMATION AND TRADEMARK AND NOT FOR TRANSFER OF R IGHTS IN THE DEFINED BAYER PHARMA AG, GERMANY, - 20 - TERRITORY. SUCH PAYMENT FOR USE OF TECHNICAL INFORM ATION AND KNOW HOW HAS TO BE CONSIDERED AS ROYALTY BOTH UNDER THE PROVISIO NS 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 AC T 1961. WE HOWEVER DO NOT FIND ANY MERIT IN SUCH ARGUMENTS. THE ROYALTY H AD BEEN RECEIVED IN CONNECTION WITH USE OF TECHNICAL INFORMATION AND TR ADEMARK FOR THE PURPOSE OF BUSINESS OR PROFESSION CARRIED ON IN IND IA. 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 O F 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 ORDER S OF CIT(A) TAXING THE PAYMENTS AS ROYALTY IN BOTH THE YEARS. 5. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE A RE DISMISSED. ORDER PRONOUNCED ON 13- 9-2013 SD/- SD/- (VIVEK VARMA) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 13.9.2013