Technical services and royalty under the India-Australia DTAA: make-available test, service PE aggregation, and gross royalty treatment

Technical consultancy and engineering support under Contracts 1 to 4 and 6 did not constitute royalty under the India-Australia DTAA because the services did not make available technical knowledge, skill, know-how or processes, and did not amount to transfer of a technical plan or design. A service permanent establishment was found for Contracts 2 to 4 and 6 by aggregating days spent in India across connected contracts with the same customer; business profits were taxable only to the extent attributable to that PE, while Contract 1 did not create a PE. Contract 5 involved development and transfer of a technical plan or design, so the receipts were royalty taxable on a gross basis without apportionment.

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Issues: (i) Whether receipts under Contracts 1 to 4 and 6 were royalty within Article XII.3 of the DTAA between India and Australia. (ii) Whether a service permanent establishment arose in India under Article V(3)(c) of the DTAA, and whether receipts under the relevant contracts were taxable as business profits only to the extent attributable to that permanent establishment. (iii) Whether the receipts under Contract 5 were royalty income taxable on gross basis without apportionment.

Issue (i): Whether receipts under Contracts 1 to 4 and 6 were royalty within Article XII.3 of the DTAA between India and Australia.

Analysis: The contractual services consisted of review, consultancy, engineering support, bid evaluation and similar technical assistance. Mere rendering of technical services was held insufficient to attract the royalty clause unless the services made available technical knowledge, experience, skill, know-how or processes, or involved development and transfer of a technical plan or design. The reports and recommendations furnished to the Indian customer were found to be project-specific advisory outputs and did not equip the recipient to apply the provider's expertise independently in future. On that basis, the receipts under Contracts 1 to 4 and 6 did not fall within the royalty definition.

Conclusion: The receipts under Contracts 1 to 4 and 6 were not royalty income.

Issue (ii): Whether a service permanent establishment arose in India under Article V(3)(c) of the DTAA, and whether receipts under the relevant contracts were taxable as business profits only to the extent attributable to that permanent establishment.

Analysis: For service PE, the relevant enquiry was whether services were furnished in India through personnel for an aggregate period exceeding 90 days within any 12-month period. The contracts with the same Indian customer and relating to connected offshore redevelopment projects were treated as part of a common commercial and geographical setting, so the days spent in India under the relevant contracts were aggregated. On that basis, the threshold was crossed for Contracts 2 to 4, and PE was also accepted for Contract 6. Contract 1 stood on a different footing because the work was completed before the later contracts commenced, and no PE existed for that contract. Once PE existed, the business income attributable to the PE was taxable under Article VII.

Conclusion: A service permanent establishment existed for Contracts 2 to 4 and 6, but not for Contract 1, and the receipts attributable to the permanent establishment were taxable as business profits.

Issue (iii): Whether the receipts under Contract 5 were royalty income taxable on gross basis without apportionment.

Analysis: Contract 5 was held to involve development and transfer of a technical plan and design. The fact that part of the work was performed outside India did not permit apportionment where the contract, on its terms and execution, had sufficient territorial nexus with India and the transfer of the plan or design took place in India. The income was therefore brought to tax as royalty on gross basis, and the plea for splitting the receipts according to where the work was done was rejected.

Conclusion: The receipts under Contract 5 were royalty income taxable on gross basis at 15%, without apportionment.

Final Conclusion: The ruling accepted the assessee's case on non-royalty character for Contracts 1 to 4 and 6, accepted service PE only for the relevant later contracts, and upheld royalty taxation for Contract 5.

Ratio Decidendi: Under the India-Australia DTAA, technical services become royalty only if they make available technical knowledge or involve transfer of a technical plan or design, and service PE may be aggregated across connected contracts with the same customer when the contractual services form one commercial continuum in India.

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