2009 (7) TMI 170 - AT - Income Tax

Indian Oil Corp. not liable for tax on payments to licensor for technical know-how

The Tribunal held that payments made by Indian Oil Corporation Ltd. (IOC) to a licensor for technical know-how and basic engineering documentation were ... Fees for technical services - royalty or like payments - right to use technical knowhow - business income v. royalty - attribution to activities performed in the territory - permanent establishment - basic engineering design package (BEDP) as knowhowFees for technical services - basic engineering design package (BEDP) as knowhow - attribution to activities performed in the territory - Whether the payments made by the assessee to the foreign licensor for the Basic Engineering Design Package (BEDP) constitute 'fees for technical services' not taxable in India because the services were rendered outside India under the IndoAustrian treaty. - HELD THAT: - The Tribunal applied the treaty rule that amounts for technical services are taxable in the source territory only insofar as they are attributable to activities actually performed there and adopted the domestic definition of 'fees for technical services' as in Explanation 2 to section 9(1)(vii). The BEDP comprised drawings, designs, process descriptions and related documentation prepared in Austria and supplied to the assessee; IOC was to set up the plant using these documents and Proner's role was limited to supervising, commissioning and startup services. The Tribunal followed prior authority and commentary distinguishing payments that confer a right to use an exploitable proprietary asset (royalty) from payments for information or knowhow used to create an asset (a plant) by the recipient. The BEDP payment was held to be consideration for passing information and tailormade design enabling IOC to create an asset, not a payment for the right to use a property or a payment determined by use; accordingly it did not qualify as royalty. Further, the amount is not taxable in India unless attributable to services performed in India or Proner had a permanent establishment in India, neither of which was shown by Revenue. Applying these principles to the contractual scope and mode of supply, the Tribunal concluded the BEDP payment was not taxable in India as a royalty and was outside Indian tax liability under the treaty.Payment for the BEDP is not royalty and, being for services performed outside India with no PE of the payee in India, is not chargeable to tax in India; hence there was no obligation to deduct tax at source.Royalty or like payments - business income v. royalty - permanent establishment - Whether, alternatively, the BEDP payment is business income (sale of a plant/design) taxable in India absent a permanent establishment of the foreign supplier. - HELD THAT: - The Tribunal accepted the alternative contention that the BEDP effectively created an asset (the plant) for the purchaser and akin to a supply of technical knowhow/basic process engineering documentation that results in business income of the supplier rather than royalty. Relying on precedent where similar payments were treated as business income, the Tribunal held that such receipts would be taxable in India only if attributable to a PE of the foreign supplier in India. As Revenue did not contend that services were rendered in India or that the supplier had a PE in India, the sums were not taxable as business profits in India.If characterized as business income, the BEDP payment is not taxable in India in the absence of a permanent establishment of the foreign supplier in India.Final Conclusion: The Tribunal allowed the appeals, holding that the payments for the basic engineering design package are not royalties taxable in India and, alternatively, would not be taxable as business income in India in the absence of a permanent establishment or services rendered in India; consequently the assessee was under no obligation to deduct tax at source. Issues involved: The issues involved in this case are the taxability of payments made by Indian Oil Corporation Ltd. (IOC) to a licensor for the use of a manufacturing process, specifically whether the payments constitute royalty under the Indo-Austrian treaty and are subject to tax in India.Summary:In this case, IOC entered into an agreement with a licensor for the use of the Biturox process in the manufacture of bitumen. The licensor provided a Basic Engineering Design Package (BEDP) to IOC, which included various technical details and designs for the plant. The taxability of payments related to the BEDP was disputed, with the tax authorities contending that the payments constituted royalty and were taxable in India.The Dy. CIT directed IOC to deduct tax at 20% before making remittances to the licensor, based on the view that the payments were for the use of a process in India and therefore qualified as royalty under the treaty. However, the Tribunal considered the nature of the payments and relevant treaty provisions to determine the tax liability.The Tribunal analyzed the agreement between IOC and the licensor, noting that the payments were for the supply of technical know-how and basic engineering documentation to create an asset in the form of a plant. The Tribunal referred to a previous ruling and concluded that the payments did not constitute royalty but were technical fees or business profits. As the services were not rendered in India and the licensor did not have a Permanent Establishment (PE) in India, the payments were not taxable in India.Relying on precedents and treaty provisions, the Tribunal held that the payments made by IOC to the licensor were not in the nature of royalty and therefore not subject to tax in India. Consequently, IOC was not obligated to deduct tax at source, and the appeals by IOC were allowed.This judgment clarifies the distinction between royalty payments and technical fees, emphasizing the importance of the nature of services rendered and the presence of a PE in determining tax liability under international treaties.