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        <h1>Classification of Income: Designs & Drawings as Business Income, Testing Services Taxable in India</h1> <h3>Outotec (Finland) Oy, Kolkata Versus DCIT (International Taxation), Circle-2 (1), Kolkata</h3> Outotec (Finland) Oy, Kolkata Versus DCIT (International Taxation), Circle-2 (1), Kolkata - TMI Issues Involved:1. Taxability of income earned from the sale of designs and drawings.2. Taxability of income from rendering testing and other services.Detailed Analysis:1. Taxability of Income Earned from Sale of Designs and Drawings:The assessee, a tax resident of Finland, earned revenue from various sources including the sale of designs and drawings to Indian customers. The primary contention was whether this income should be classified as business income or as royalty/fees for technical services (FTS) under the Income Tax Act and the India-Finland Double Taxation Avoidance Agreement (DTAA).The Assessing Officer (AO) held that the income from the sale of designs and drawings was taxable in India as royalty under both the Act and the DTAA. The AO’s findings were based on the following points:- The supply of designs and drawings did not constitute a 'sale of goods' as only a license to use these designs was granted, not the transfer of title.- The intellectual property of the designs remained with the appellant, and the Indian customer was only granted a license to use them.- The designs and drawings were protected by intellectual property rights and involved technical services, thus falling under the purview of royalty and FTS.- The designs were tailor-made as per customer requirements and involved significant technical input, making them taxable under Section 9(1)(vii) of the Act and Article 12 of the DTAA.The Tribunal, however, disagreed with the AO’s findings. It noted that similar issues in the group company’s cases (Outotec GmbH) were adjudicated in favor of the assessee. The Tribunal held that:- The designs and drawings were sold outside India, and the consideration was received outside India in foreign currency.- The designs and drawings were not embedded in the plant and machinery but were separate items sold to the Indian customers.- The transaction was considered a sale of a copyrighted article rather than the use of a copyright, making it business income.- As the assessee did not have a permanent establishment (PE) in India, the business profits were not taxable in India.Thus, the Tribunal concluded that the income from the sale of designs and drawings should be classified as business income and, in the absence of a PE in India, it could not be taxed in India.2. Taxability of Income from Rendering Testing and Other Services:The assessee also earned income from rendering testing and other services, which were performed outside India (in Finland). The AO held that this income was taxable as royalty/FTS under both the Act and the DTAA, citing the following reasons:- Article 12 of the DTAA allows the source country (India) to tax royalty/FTS at a preferential rate of 10%.- The services were ultimately used in India, making the income taxable in India.- Payments were in respect of permanent establishments (PEs) in India, thus taxable in India.The Tribunal examined Article 12(5) of the India-Finland DTAA, which states that royalties or FTS are deemed to arise in a contracting state where the payer is located or where the services are performed. The Tribunal noted that:- The testing services were performed outside India.- The payment was for the test results used in India, not for the process of testing itself.The Tribunal upheld the AO’s view, stating that the payment was for the results of testing used in India, making the income taxable in India. The argument that the services were performed outside India did not exempt the income from being taxed in India, as the results were used within the contracting state.Conclusion:The appeal was allowed in part. The income from the sale of designs and drawings was classified as business income and not taxable in India due to the absence of a PE. However, the income from rendering testing and other services was deemed taxable in India as the results of these services were used in India.

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