Treaty protection for project-specific architectural drawings blocked royalty treatment and TDS liability

Delay in filing the appeals was condoned because the assessee showed a bona fide mistake in first challenging a common order and later filing separate appeals, with no negligence or deliberate inaction. Payments for project-specific architectural drawings, designs and plans made to a non-resident without a permanent establishment in India were held not to be royalty or fees for included services, as there was no transfer of technical know-how, no making available of technical knowledge, skill or process, and the drawings remained the foreign entity's property. Treaty protection prevailed, so no tax deduction at source was required and the withholding demand was set aside.

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Issues: (i) Whether the delay of 816 days in filing the appeals deserved condonation on showing sufficient cause; (ii) Whether payments made for project-specific architectural drawings, designs and plans to a non-resident foreign entity were taxable as royalty or fee for included services so as to attract deduction of tax at source.

Issue (i): Whether the delay of 816 days in filing the appeals deserved condonation on showing sufficient cause.

Analysis: The delay occurred because the assessee had initially filed one appeal against a common order covering two assessment years and later filed separate appeals after realizing the mistake. The explanation showed bona fide error and no negligence or deliberate inaction. The explanation for delay was accepted in the interests of adjudication on merits.

Conclusion: The delay of 816 days was condoned in favour of the assessee.

Issue (ii): Whether payments made for project-specific architectural drawings, designs and plans to a non-resident foreign entity were taxable as royalty or fee for included services so as to attract deduction of tax at source.

Analysis: The foreign entity had no permanent establishment in India and rendered services from outside India. The consideration was for project-specific drawings and designs for a commercial project, with no transfer of technical know-how, skill, process or copyrighted scientific work. The drawings and documents remained the property of the foreign entity, and the assessee received no ability to independently exploit any technology or make available technical knowledge. On these facts, the payments did not fall within royalty or fee for included services under the treaty, and treaty protection applied over the Act.

Conclusion: The payments were not taxable as royalty or fee for included services, and no obligation to deduct tax at source arose.

Final Conclusion: The appeals were allowed and the demand raised under the withholding-tax provisions was set aside.

Ratio Decidendi: Project-specific architectural drawings and designs, without transfer of technical know-how or making available technical knowledge, experience, skill, know-how or process, do not constitute royalty or fees for included services under the India-USA tax treaty.

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