2026 (3) TMI 1266 - AT - Income Tax

Project-specific design deliverables are not royalty when only bespoke outputs are transferred, not rights to exploit pre-existing IP.

Consideration for preparing and transferring project-specific bridge designs, drawings, reports and other deliverables under a sub-consultancy agreement ... Royalty receipts under India-UAE DTAA - income taxable in India or not? -Outright transfer of design and drawings - Use of or right to use design - professional fee received by the assessee in lieu of provision for Design Support Services - difference in consideration received for sale of design and drawings and consideration received for the use of or the right to use design. HELD THAT: - On examination of the scope of work, remuneration clause and Article 13 of the agreement, the Tribunal found that the assessee developed project-specific designs, drawings, reports and other deliverables and transferred them to Systra India, which was to own those documents and associated intellectual property rights for the project. The case was therefore one of outright transfer of project-specific designs and not one where consideration was paid for the use of, or the right to use, a design. Tribunal held that Article 12(3) of the India-UAE DTAA covers payments for use or right to use a design, whereas payments for sale or transfer of project-specific designs fall outside that definition. Since the assessee had opted for treaty protection, the wider domestic definition of royalty under the Act could not be applied. [Paras 11, 12, 13, 14, 15] The receipt was held not to be royalty under the India-UAE DTAA, the contrary characterization by the Assessing Officer was rejected, and the assessment on this issue was set aside. Final Conclusion: The Tribunal held that the consideration received for project-specific bridge designs and related deliverables represented an outright transfer and not consideration for the use of, or the right to use, any design. The amount was therefore not taxable as royalty under the India-UAE DTAA, and the assessee's appeal was allowed. Issues: Whether the consideration received for preparing project-specific bridge designs, drawings, reports and deliverables under the sub-consultancy agreement constituted royalty taxable in India under the Act and the India-UAE DTAA.Analysis: The agreement showed that the assessee was engaged to develop bridge designs and related deliverables for a specific project, and that the resulting documents, reports and data were to vest in the Indian company. The Tribunal found that the payment was for creation and transfer of project-specific design outputs, not for the use of, or right to use, any pre-existing design, model, plan or copyright. The treaty definition of royalty under Article 12(3) was held not to cover such outright transfer of design deliverables, and the domestic deeming provision under section 9(1)(vi) could not prevail where the DTAA applied.Conclusion: The receipt was not royalty and was not taxable in India on that basis.Ratio Decidendi: Consideration for developing and transferring project-specific designs and drawings, where the recipient does not retain a right to exploit the work but merely receives the deliverables, is not royalty under Article 12(3) of the India-UAE DTAA.