Royalty on design documentation can be taxed in India and attract withholding tax despite no permanent establishment.

An appeal against a direction for tax deduction at source under section 195(2) was treated as maintainable because the statutory right of appeal was recognised under section 248. On the substantive tax issue, remittance for design and documentation supplied by a foreign contractor was characterised separately from the wider plant-setting contract and treated as royalty, since the materials embodied information derived from industrial, commercial or scientific experience. The payment was therefore regarded as taxable in India and subject to withholding tax under the relevant treaty and domestic law. The absence of a permanent establishment in India did not prevent taxation of the royalty component.

---

---

Issues: (i) whether an appeal lay against a direction for deduction of tax at source under section 195(2) of the Income-tax Act, and (ii) whether the remittance for design and documentation supplied by the foreign contractor constituted royalty taxable in India and liable to deduction of tax at source.

Issue (i): whether an appeal lay against a direction for deduction of tax at source under section 195(2) of the Income-tax Act.

Analysis: The statutory scheme was examined and it was noted that the right of appeal in this situation was specifically provided by section 248. The objection that the order under section 195(2) was not appealable was therefore rejected.

Conclusion: The appeal was maintainable, against the assessee.

Issue (ii): whether the remittance for design and documentation supplied by the foreign contractor constituted royalty taxable in India and liable to deduction of tax at source.

Analysis: The agreement was analysed as a composite arrangement for setting up the plant, but the payment in dispute was treated separately as consideration for design and documentation. The Court held that the documents embodied information derived from industrial, commercial or scientific experience and that such consideration fell within the definition of royalty in the double taxation agreement as well as within section 9(1)(vi) of the Income-tax Act. The absence of a permanent establishment in India did not prevent taxation of royalty, and the cited foreign decisions were found distinguishable on facts.

Conclusion: The remittance was taxable as royalty and tax had to be deducted at source, in favour of Revenue.

Final Conclusion: The Department's appeal succeeded and the order of the Assessing Officer was restored because the disputed remittance was held to be taxable royalty.

Ratio Decidendi: Consideration for technical documentation that embodies information derived from industrial, commercial or scientific experience is royalty and is taxable in India under section 9(1)(vi), even where the foreign recipient has no permanent establishment in India; such a payment can be treated separately from a larger composite supply contract.

---