TaxTMI 
TaxTMI 
2019 (6) TMI 777
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....arily earned revenue from (i) sale of designs and drawings; (ii) rendition of technical services; (iii) license fees; and (iv) testing and other services." 3. The assessee company filed its return of income on 26.11.2015 declaring total income of Rs. 1,89,38,136/-. It offered to tax income from rendition of technical services of Rs. 1,82,71,454/- and income from royalty(licence fees) of Rs. 6,66,682/-. It did not offer to tax income received from the sale of designs and drawings of Rs. 2,80,87,244/- and income from rendering testing and other services of Rs. 3,36,21,283/-. The assessee's case is that, income from sale of designs and drawings is a sale of copyrighted article and the income derived therefrom is business income and as the assessee does not have a permanent establishment in India, and hence the business profits are not taxable in India. On the issue of income from rendering of testing and other services, the assessee company relies on Article 12(5) of the India-Finland DTAA and as the services, in question, had been rendered outside India, it claimed that the same is not taxable in India. 4. The Assessing Officer did not agree with these contentions of the assess....
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....nd scientific experience, therefore the contract with the customer constituted a contract for services of highly skilled and technical nature and accordingly fall under purview of technical service taxable u/s 9(1)(vii) of the Act as well as Article 12 of the DTAA. 6. Appellant's reliance on the decision of appellant's group company's Outotec GmbH's case is not appropriate in the present case as the said decisions were challenged by revenue before the Hon'ble High Court of Calcutta which is pending for adjudication. 7. Reliance was placed on following decisions to substantiate the contention that income from sale of design and drawings tantamount to Fees for technical services:- * POSCO Engineering & Construction Co. Ltd vs. Addl. CIT [42 taxmann.com 500] * Linde AG vs DIT [44 taxmann.com 244] * Hindustan Shipyard Ltd. vs. ITO [18 Taxmann.com 89] * Mannesman Demag Sack AG vs ACIT [119 TTJ 543] * In re, GMP International GmbH [321 ITR 411] 8. In interpreting the DTAA, specific provisions such as royalty and technical services should be given precedence over general provisions like Article 7 which deals with busi....
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....rd technologies available with it, based on which designs and drawings was prepared outside the territory of India and the sale of the same was also affected outside the territory of India for consideration which was also received outside India in foreign currency. He submitted that similar issue on identical set of facts has come up before different Benches of ITAT in the case of the assessee's group concerns i.e. Outotec GmbH for the Assessment Year 2010-11 and 2011-12 and issue was adjudicated in his favour. He pointed out that the both the contentions of the Assessing Officer that, the income in question is royalty or in the alternative is fees for technical services was considered by this Tribunal in the above referred cases and was adjudicated upon, in favour of the assessee. He took this bench to each of these orders and submitted that the Assessing Officer was wrong in stating that the facts of these cases are not identical to that of the facts of the assessee's case. He submitted that the ratio of the decision in the assessee's group case has to be applied and the additions in question is to be deleted. 8. On the issue of taxability of income from rendering of testing a....
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....ty or in the alternative as FTS in the source country i.e. India, both under the Act, as well as under the treaty. He argued that the services have been availed in India and though the assessee rendered the services outside the country, it does not take away the right of source country to tax this amount. He distinguished the interpretation of the ld. Counsel for the assessee on this issue and relied on the order of the Assessing Officer /DRP and submitted that the same be upheld. 11. Both parties agreed with the Ground Nos.4 & 5 as consequential in nature and that Ground No.6 is premature. 12. Rival contentions heard. On a careful consideration on the facts and circumstances of the case, perusing the papers on record and orders of the authorities below as well as case laws cited, we hold as follows. 13. The first issue is that of taxability of income earned from sale of designs and drawings. A copy of agreement in question is placed at Page 15 of the Paper Book. This is executed by the Tata Steel Limited and the assessee on 15.01.2014. The Article 1 of this Agreement reads as follows: "In consideration of the payments to be made by the purchaser to the contractor....
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....e drawings, designs, charts, plants etc. constitute a plant and are entitled to depreciation, Hon'ble Supreme Court held in the affirmative case on page no 97 of the report as under: "Obviously, the purpose of rendering such documentation service by supplying these documents to the assessee was to enable it to undertake its trading activity of manufacturing the odolites and microscopes and there can be no doubt that these documents had a vital function to perform in the manufacture of these instruments; in fact it is with the aid of these complete and up-to-date sets of documents that the assessee was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basis tools of the assessee's trade having a fairly enduring utility, though owing to technological advances, they might or would in course of time become obsolete. We are, therefore, clearly of the view that the capital asset acquired by the assessee,....
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....y license to use the same is granted. In this way, the true nature of the receipts are Royalties under section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of India-Germany DTAA rather than Sale of designs and Drawings as a product. It was explained that the nature of retaining intellectual property in designs and drawings, due to which the ownership has never passed on to the buyer, is similar in nature to the retaining of patented rights in any goods / machinery. For example, if any customer purchases a car, in that case, the company does not transfer its patent or intellectual property to the buyer of the car but that does not change the nature of the transaction from sale of a product to use of a patent/intellectual property. Similarly, restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of license/know-how and the mere fact that the word license has been use in the agreement would not make any difference. The assessee explained that the design and drawings sold by it were used by the Indian customers fo....
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....anted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example on to the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of the software which incorporates computer program. Regardless of whether this right is granted under the law or under a license agreement with the copyright holder, copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying where they do n more than enable the effective operation of the program b....
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.... the rights which the copyright owner has, in necessary to trigger the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all the of the enumerated rights ingrained in a copyright. Where the purpose of the licenceors the transaction is only to establish access to the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself has been transferred to any extent. It does not make any difference even if the computer programme passed on to the user is a highly specialized one. The parting of intellectual property rights inherent in and attached to the software product in favour of the licencee/customer is what is contemplated by the definition clause in the Act as well as the Treaty. As observed earlier, those rights are incorporated in Section 14. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, in our view, amount to transfer of rights in relation to copyright or conferment of....
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.... and to avoid protracted litigation with the revenue. 37. From the above facts and legal position, it is clear that the basic engineering packages sold by the assessee to the Indian customers have been largely designed on the basis of standard technologies available with it. The consideration was, therefore, for the sale of the product, which is embedded in the plant set up by the Indian customers and does not constitute royalty and is in the nature of business income. Since the work was done outside India and sale was taken place outside India, such income is not taxable under the provisions of the Act and DTAA. Retaining intellectual property in designs and drawings is similar in the nature to the retaining of patented rights in any goods/machinery. Restriction on the intellectual property in designs and drawings sold by the assessee for the purpose of setting up a plant in India does not change the character of the transaction from the sale of the product to the use of licence/know-how. Normally, designs and drawings sold by foreign customers were used by Indian customers for internal business purposes for setting up of their plants and not for any commercial exploitati....
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....chnical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated." [Emphasis ours] 19. The first sentence of this Clause lays down that the royalties or fees for technical services shall be deemed to arise in a Contracting State where the payer is located. In cases where the right of property, for which royalty was paid is used within a contracting state or a case where the fees for technical services relate to services were performed within a contracting state, then the income shall be deemed to arise in the state in which the right of property is used or the state in which the services were performed. The third limb relates to the case where there is a permanent establishment which is not relevant in our case. 20. In the case on hand, the income in question becomes taxable as royalty or fees for technical services, is deemed to arise in the contracting state where the payer is a resident of that contracting state, which is in India, in our case. 21. ....