Royalty characterization of project-specific design payments rejected under treaty, treating receipts as transfer of deliverables.

Consideration for preparing and supplying project-specific bridge designs, drawings, reports and related deliverables was treated as payment for development and transfer of specific work product, not for the use of or right to use an existing design. Because the agreement provided that the deliverables would vest in the client and the remuneration was a lump sum for agreed outputs, the payment did not fall within royalty under Article 12(3) of the India-UAE DTAA. The domestic royalty deeming provision in section 9(1)(vi) could not override the more favourable treaty position, so the receipts were not taxable as royalty and the addition was unsustainable.

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Issues: Whether the consideration received for preparation and supply of bridge designs, drawings, reports and related deliverables under the agreement constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-UAE DTAA, or whether it was consideration for transfer of project-specific designs outside the royalty definition.

Analysis: The scope of work showed that the assessee was engaged to prepare project-specific designs, drawings, reports and deliverables for a particular bridge project. The agreement also provided that the documents and deliverables prepared for the project would vest in the client, and the remuneration was a lump sum for the agreed deliverables. On these facts, the payment was for development and transfer of specific designs and drawings, not for the mere use of or right to use an existing design. The treaty definition of royalty in Article 12(3) was therefore not attracted. The domestic deeming provision in section 9(1)(vi) could not prevail where the treaty position was more favourable to the assessee.

Conclusion: The receipts were not taxable as royalty and the addition was unsustainable.

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