Tower design service payments: FTS, not royalty, and no withholding tax where no treaty FTS clause or Indian PE exists.

Payments for freshly created tower design services were treated as fees for technical services, not royalty, because the arrangement involved project study, drawings and test data created for the payer's specifications rather than use of pre-existing copyrighted design rights. The commentary also states that, where the India-UAE treaty contains no fees for technical services article and the UAE recipient has no permanent establishment in India, such payments are not taxable in India under treaty principles. On that basis, no withholding tax obligation arises on the remittance.

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Issues: (i) Whether the payments made for tower design services were royalty or fees for technical services; (ii) whether, in the absence of a fees for technical services article in the India-UAE treaty and in the absence of a permanent establishment in India, tax was required to be withheld on the payments.

Issue (i): Whether the payments made for tower design services were royalty or fees for technical services.

Analysis: The payments were made for project specification study, preparation of tower designs, structural drawings, tower test data documents and related services under a service agreement. The arrangement did not involve supply of any pre-existing design or grant of any right to use an existing design. The service provider was engaged to create fresh designs based on the assessee's specifications, which amounted to active rendering of technical services rather than exploitation of copyrighted material or transfer of rights in a design.

Conclusion: The payments were correctly treated as fees for technical services and not royalty.

Issue (ii): Whether, in the absence of a fees for technical services article in the India-UAE treaty and in the absence of a permanent establishment in India, tax was required to be withheld on the payments.

Analysis: Where the treaty does not contain a specific fees for technical services clause, such receipts can be taxed in India only if they fall within some other treaty provision, ordinarily as business profits where the non-resident has a permanent establishment in India. On the facts, there was no allegation or material showing a permanent establishment or business connection of the UAE service provider in India. The record also showed that the UAE entity was a tax resident of UAE and had no permanent establishment in India.

Conclusion: The payments were not chargeable to tax in India and the assessee had no obligation to deduct tax at source.

Final Conclusion: The addition made under the withholding tax provisions was rightly deleted, and the Revenue's challenge failed.

Ratio Decidendi: A payment for freshly created technical design services is fees for technical services, not royalty; and where the applicable treaty has no fees for technical services clause and the non-resident has no permanent establishment in India, the payment is not taxable in India and no withholding obligation arises.

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