Outright purchase of designs and genuine expense reimbursement were held outside royalty, FTS and withholding tax scope

Payment for detailed designs and drawings supplied by a non-resident was treated as an outright purchase of saleable work product, not a transfer of rights or provision of taxable technical services, so it did not constitute royalty or fees for technical services and no withholding under section 195 arose. Reimbursement of marketing expenses paid to a foreign company was also held to be a pure reimbursement supported by vouchers and certificates, with no separate service element, no business connection or PE in India, and therefore no taxable income in India. On the stated facts, both payments fell outside withholding tax obligations.

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Issues: (i) Whether payment made for supply of designs and drawings to a non-resident architect firm was an outright purchase and not taxable as royalty or fees for technical services. (ii) Whether payment made to a non-resident for marketing activity was a mere reimbursement of expenses and not consideration for services attracting deduction of tax at source.

Issue (i): Whether payment made for supply of designs and drawings to a non-resident architect firm was an outright purchase and not taxable as royalty or fees for technical services.

Analysis: The agreement for the project contemplated supply of detailed designs and drawings, with payment linked to the stages and components of the work. The designs and drawings were procured by the non-resident contractor and then supplied to the assessee under a separate transaction. The material on record did not show a transfer of all rights in the designs and drawings to the assessee, but showed a sale of the completed designs and drawings for the project. Designs and drawings are independently saleable assets, and where the transaction is one of outright purchase, the payment does not assume the character of royalty or fees for technical services. In such a case, no income is deemed to accrue or arise in India in the hands of the non-resident, and the withholding obligation under section 195 does not arise.

Conclusion: The payment was an outright purchase and was not taxable as royalty or fees for technical services. The issue is decided in favour of the assessee.

Issue (ii): Whether payment made to a non-resident for marketing activity was a mere reimbursement of expenses and not consideration for services attracting deduction of tax at source.

Analysis: The lower authorities recorded concurrent findings that the amounts paid to the foreign company were supported by vouchers and certificates and were only reimbursements of actual marketing expenses incurred for the project. The assessee did not receive any separate service from the payee and the payee had no business connection or permanent establishment in India. A pure reimbursement, without income element, does not give rise to taxable income in India. On these facts, the payment could not be treated as royalty or fees for technical services, and section 195 was not attracted.

Conclusion: The payment was a reimbursement of expenses and not consideration for services. The issue is decided in favour of the assessee.

Final Conclusion: Both questions were answered against the Revenue. The payment for designs and drawings and the reimbursement of marketing expenses were held not to give rise to taxable income in India, and the appeal failed.

Ratio Decidendi: Where a payment is found on the facts to be an outright purchase of designs and drawings or a genuine reimbursement of expenses, without transfer of rights or rendering of taxable services, no income accrues or arises in India and the payer has no obligation to deduct tax at source under section 195.

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