Whether payment made by Indian company to a foreign company for supplying drawings is Royalty or not

Facts of the case:

1. The Indian company (“the assessee”) had entered into an agreement with company (“foreign company”) incorporated under the laws of Austria, whereby the foreign company granted to the assessee exclusive and individual right and licence to use manufacturing information supplied by foreign company to manufacture, assemble and sell vehicle in India.
2. As per agreement, the foreign company have to supply drawings, designs, specifications, processes, schedule and all other relevant technical details and documents to the assessee for which the assessee has to pay an amount of 3 Million Austrian Schilling in three instalments before commencement of production along with 1% as royalty up to 50,000 vehicles, 0.75% royalty from 50,000 to 100,000 vehicles and 0. 5% royalty above more than 100,000 vehicles produced.
3. When the assessee paid 3 Million Austrian Schilling to foreign company, the assessee did not deducted TDS on the same with the view that the payment is not in the nature of “Royalty”.
4. During the scrutiny, 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

Held by the Hon’ble High Court:

It was the case in which the payment of 3 million Austrian Schilling was for the supply of material and their use would arise when the vehicles would be started to be produced and at that stage royalty would become payable. Further, Royalty is defined 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”. Hence, assessee was not liable to deduct TDS on such payment.

Conclusion:

By entering into the agreement and by supplying the material, the foreign company authorized its use but its actual use would start only when production and sale commenced and that would be the stage at which royalty would be payable.

Source: [2019] 110 taxmann.com 261 (Punjab & Haryana)

Majestic Auto Ltd. Vs Commissioner of Income-tax, Ludhiana, IT reference no. 60 OF 1995 (O&M), High court of Punjab and Haryana