Royalty characterization of design and documentation payments under the India-France treaty triggered Indian tax deduction at source.

Consideration paid for design and documentation supplied by a French contractor was treated as royalty because the material embodied information derived from industrial, commercial or scientific experience. On that footing, the definition of royalty in section 9(1)(vi) of the Income-tax Act and Article VII of the India-France treaty was wide enough to bring the payment to tax in India, and the absence of a permanent establishment did not prevent taxation of the royalty component. The contract was also severable, so the documentation payment could be examined separately from other services, and tax deduction at source was required.

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Issues: Whether the payment for design and documentation remitted to the French contractor was royalty within the meaning of section 9(1)(vi) of the Income-tax Act and Article VII of the India-France Double Taxation Avoidance Agreement, and therefore liable to tax deduction at source.

Analysis: The payment was for documentation and designs supplied under the contract for setting up the plant. The documentation embodied information derived from the foreign contractor's industrial, commercial or scientific experience, and the definition of royalty in the treaty as well as in section 9(1)(vi) was wide enough to cover such consideration. The absence of a permanent establishment in India did not preclude taxation of royalty under the treaty. The contract was also severable, so the documentation payment could be examined independently of other services.

Conclusion: The payment was royalty and taxable in India, so tax deduction at source was rightly required. The issue is decided against the assessee and in favour of the Revenue.

Ratio Decidendi: Consideration paid for documentation or designs which constitute information drawn from industrial, commercial or scientific experience is royalty and is taxable under the India-France treaty and section 9(1)(vi) of the Income-tax Act, 1961.

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