The Majestic Auto Ltd. v. The Commissioner of Income-tax, Ludhiana
[Citation -2019-LL-0724-89]

Citation 2019-LL-0724-89
Appellant Name The Majestic Auto Ltd.
Respondent Name The Commissioner of Income-tax, Ludhiana
Court HIGH COURT OF PUNJAB & HARYANA
Relevant Act Income-tax
Date of Order 24/07/2019
Judgment View Judgment
Keyword Tags avoidance of double taxation • tax deduction at source • commercial production • supply of material • nature of royalty
Bot Summary: Whether on the facts and in the circumstances of the case and true interpretation of the documents, the Hon'ble Tribunal was right in holding that there was no distinction 1 of 4 ::: Downloaded on - 16-08-2019 10:27:36 ::: ITR-602-1995 2 between the expression supply and use for the supply of designs and drawings and thus the provisions of tax deduction at source were applicable to the above payment 2. The agreement further had a separate Clause No. 2.1 for royalty as per which after the production started the assessee would pay 1 as royalty up to 50,000 vehicles,. The dispute in the present case is whether similarly for the payment of 3 million Austrian schilling also the assessee was liable to deduct tax at source 5. The A.O. held that even for the payment of 3 million Austrian Schilling, the assessee was liable to deduct tax at source since it was in the nature of royalty payment. In an appeal filed by the assessee, the Commissioner held that this payment was not royalty payment and as per the convention signed between the Government of India and Austria for the avoidance of double taxation with respect to taxes on income, the amount of 3 million Austrian shillings would be taxable in the hands of PUCH in Austria and would not be exigible to tax in India since it was not payment made for royalty. To our mind 'royalty is a payment to an owner for the ongoing use of its assets or property such as patents or natural resources for business purposes. Ltd.,, 2008(3) SCC 30 as 'the remuneration paid to an author in respect of the exploitation of a work, usually referring to payment on a continuing basis rather than a payment consisting of a lump sum in consideration of acquisition of rights.


IN HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH 357 ITR-602-1995 (O&M) Date of Decision : 24.07.2019 Majestic Auto Ltd., Ludhiana Appellant Versus Commissioner of Income Tax, Ludhiana. Respondent CORAM: HON'BLE MR. JUSTICE AJAY TEWARI HON'BLE MR. JUSTICE HARNARESH SINGH GILL Present: Mr. Alok Mittal, Advocate for appellant. Mr. Rajesh Katoch, Senior Standing counsel with Ms. Pridhi Jaswinder Sandhu, Junior Standing Counsel for Income Tax Department. AJAY TEWARI, J (ORAL) 1. This reference has been made to consider following questions :- "1. Whether on facts and in circumstances of case and interpretation of agreement of assessee- company Majestic Auto Limited with Steyr-Daimler-PUCHAG (PUCH), Austria and Convention for avoidance of double taxation between India and Austria, Hon'ble Tribunal was right in holding that sum of Rs.9,34,579/- paid to Puch was subjected to deduction of tax at source? 2. Whether on facts and in circumstances of case and material on record, Appellate Tribunal was right in holding that consideration pain to Puch for supply of designs, drawings and specifications was nothing but "royalty" and subjected to deduction of tax at source? 3. Whether on facts and in circumstances of case and true interpretation of documents, Hon'ble Tribunal was right in holding that there was no distinction 1 of 4 ::: Downloaded on - 16-08-2019 10:27:36 ::: ITR-602-1995 2 between expression "supply" and "use" for supply of designs and drawings and thus provisions of tax deduction at source were applicable to above payment?" 2. brief facts are that assessee had entered into agreement with Steyr-Daimler-Puch AG (Puch), (Materised Two Wheel Division), Austria, whereby letter head granted to assessee exclusive and individual right and licence to use manufacturing information supplied by PUCH to manufacture, assemble and sell in India vehicle Maxi Plus and Super Maxi. As per Clause No. 1.4 PUCH supplied drawings, designs, specifications, processes, schedule and all other relevant technical details and documents to assessee for which assessee paid amount of 3 Million Austrian Schilling in three installments as detailed below:- a) First 1/3rd after agreement is filed with Reserve Bank of India and Capital Goods Clearance if any, is obtained, however, not later than 10 days from date of approval of Reserve Bank of India. b) Second 1/3rd on delivery of technical documentation (as defined in Annex. 2) however, not later than 30 days after receipt of PUCH's confirmation that complete technical documentation has been delivered. c) Third and final 1/3rd on commencement of commercial production or four years after agreement is filed with RBI whichever is. 3. agreement further had separate Clause No. 2.1 for royalty as per which after production started assessee would pay 1% as royalty up to 50,000 vehicles, .75% royalty from 50,000 to 100,000 vehicles and . 5% royalty above more than 100,000 vehicles produced. At this stage, it would be apposite to notice that there is no dispute that on royalty paid under Clause 2.1, assessee is liable to deduct tax at source. 2 of 4 ::: Downloaded on - 16-08-2019 10:27:36 ::: ITR-602-1995 3 4. dispute in present case is whether similarly for payment of 3 million Austrian schilling also assessee was liable to deduct tax at source? 5. A.O. held that even for payment of 3 million Austrian Schilling, assessee was liable to deduct tax at source since it was in nature of royalty payment. In appeal filed by assessee, Commissioner held that this payment was not royalty payment and as per convention signed between Government of India and Austria for avoidance of double taxation with respect to taxes on income, amount of 3 million Austrian shillings would be taxable in hands of PUCH in Austria and would not be exigible to tax in India since it was not payment made for royalty. Revenue carried matter to Tribunal. It was case of assessee that payment of 3 million Austrian Schilling was for supply of material and their use would arise when vehicles would be started to be produced and at that stage royalty would become payable. main plank on which Tribunal passed its decision was its interpretation of word 'supply and it held that 'supply' includes 'use'. 6. At this stage, it would be important to understand concept of 'royalty' . To our mind 'royalty is payment to owner for ongoing use of its assets or property such as patents or natural resources for business purposes.' 7. Word 'royalty' has been defined by Supreme Court in case titled as Entertainment Network (I) Ltd. v. Super Cassette Inds. Ltd.,, 2008(3) SCC 30 as 'the remuneration paid to author in respect of exploitation of work, usually referring to payment on continuing basis (i.e. 10 percent of sale price) rather than payment consisting of lump sum in consideration of acquisition of rights. May also be applied to 3 of 4 ::: Downloaded on - 16-08-2019 10:27:36 ::: ITR-602-1995 4 payment to performers.' and further in case titled as State of H.P. v. Raja Mahendra Pal, 1999 (4) SCC 43 as "a payment reserved by grantor of patent, lease of mine or similar right, and payable proportionately to use made of right by grantee, which shall on payment of money, but may be payment in kind being part of produce of exercise of right.' (excerpts taken from Supreme Court on Words, Phrases and Legal Expressions (Judicially defined) 1950- 2015 Volume III. 8. Word 'Royalty' has been defined in Oxford Advanced Learner's Dictionary (New 9th Edition) as 'a sum of money that is paid by oil or mining company to owner of land that they are working on' 9. Thus understood, assessee would have to pay certain amount of money to PUCH for every vehicle which is sold using its designs. 10. In our considered opinion, Tribunal has given unnatural and strained meaning to expression 'supply'. Yes, by entering into agreement and by supplying material PUCH authorized its use but its actual use would start only when production and sale commenced and that would be stage at which royalty would be payable. 11. No other argument has been raised before us. 12. Though reference is answered in favour of assessee and against revenue. ( AJAY TEWARI ) JUDGE ( HARNARESH SINGH GILL ) 24.07.2019 JUDGE pooja saini Whether speaking/reasoned? Yes/No Whether reportable? Yes/No 4 of 4 Majestic Auto Ltd. v. Commissioner of Income-tax, Ludhiana
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