AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (3) TMI 353
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....ground no. 4 in ITA 351/Kol/2022 for AY 2019-20. Both the appeals are disposed off by this consolidated order. 2.1. First, we shall take up the appeal vide ITA No. 350/Kol/2022 for AY 2018-19.Grounds of appeal raised by the assessee in ITA 350/Kol/2022 for AY 2018-19 are reproduced as under: "1. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Deputy Commissioner of Income Tax ("Ld. AO") under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") is bad in law. . 2. Taxability of income earned from testing and other services a. That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the income earned from testing and other services is taxable in India under the provisions of Article 12 of he India- Finland DTAA . b. That on the facts and circumstances of the case and in law, the Ld. A.O passed the draft order without giving the assessee and adequate opportunity of being heard on this issue which is against the principles of natural justice. c. That on the facts and in the circumstances of the case and in law, Ld. AO/DR....
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....posing to initiate penalty under Section 271A and 271B of the Act. 3. Brief facts of the case are that assessee is incorporated in Finland and is a tax resident of the same. Assessee is a worldwide leader in providing innovative and environmentally sound solutions for a wide range of customers in metals processing industries. During the year under consideration, with regard to Indian projects, assessee has earned revenue, tabulated as under, for which return of income was filed - Description Income (Rs.) Rate of Tax Income from Technical Service 83,95,883/- @10% Income from Royalty 2,35,540/- @10% 4. In the course of assessment proceedings, Ld. AO treated revenue of Rs.65,14,664/- on account of testing and other services provided by the assessee to Outotec India Pvt Ltd, Hindustan Zinc Ltd, etc. as income from fees for technical services (FTS) on the basis of scope of work extracted from the contract of the assessee with Hindustan Zinc Ltd for Graphite Pre Float& Flash Float Study of RAM Ore Type to Maximize Metal Recoveries. On this treatment by the Ld. AO, assessee contended that these tests were conducted in Finland without any employees of the a....
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....essee is in appeal before the Tribunal. 7. Before us, ld. Counsel for the assessee at the outset submitted that the two issues are squarely covered by the orders of the Coordinate Bench of ITAT Kolkata in the case of the assessee itself by the earlier years. He submitted that on the issue relating to taxability of income from testing and other services, claim of the assessee was rejected by the Hon'ble ITAT Kolkata in the case of the assessee for AY 2015-16 in ITA nos. 2601/Kol/2018 and for AY 2016-17 in ITA No. 2356/Kol/2019 dated 18.10.2022. Accordingly, ground no. 2 in the present appeal is covered by the said decisions against the assessee. In this respect, ld. Counsel stated that assessee has not accepted the said decisions and is in appeal for AY 2015-16 before the Hon'ble High of Calcutta vide appeal no. ITA 139/2019, pending for adjudication. 7.1. On the issue of taxability of income from supply of design and drawings, ld. Counsel submitted that this is covered in favor of the assessee by the aforesaid order of the Coordinate Bench in the case of assessee itself for AY 2015-16 reported in [2019] 109 taxmann.com 69 (Kol). He also stated that this issue was also allowed....
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....vices 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. The income, m question, is also taxable in India as the right or property for which the royalty was paid, is used within India and hence, it is deemed to arise in I....
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....s also received outside India in foreign currency. 11.1. We have gone through the decision of the Coordinate Bench in the case of the assessee itself for AY 2015-16 by which this issued is claimed to be covered. Relevant extracts from the said decision are reproduced below for ease of reference: "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, the Contractor hereby covenants with the Purchaser to supply imported designs and drawings for civil and structural work, utilities and other services, erection, start-up, commissioning and demonstration of performance tests etc. for Chromite Tailing Retreatment Plant of capacity 50TPH minimum or 70TPH maximum conforming to the Technical Specification and as per the scope of work as defined in Schedule 1 of this Agreement at TATA STEEL Works at Sukinda, Odisha." 14. A copy of the invoices raised....
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....rm 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, namely, the technical knowhow in the shape of drawings, designs, charts, plans, processing date and other literate falls within the definition of "plant" and is, therefore, a depreciable asset". (Emphasis supplied) Since the assessee supplied the designs and drawings for setting up plants in India, in light of the above judgment, such designs and drawings partake the character of a product and accordingly, it is clear that the income arising to the as....
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....n 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 for internal business purpose of setting up of their plants and not for any commercial exploitation. Accordingly, the designs and drawings sold by the assessee tantamount to the use of a 'copyrighted article' rather than use of a 'copyright' and is therefore in the nature of business income. Reliance in this regard is also placed on Commentary on Double Tax Conventions by Klaus Vogel. The relevant extract is reproduced below: "........
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....rams 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 by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article7. 14.2 The method of transferring the computer program to the transferee is not relevant. For example it does not matter whether the transferee acquires a computer disk containing a copy of the program or directly recei....
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....usiness 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 the right of using the copyright. However, where, for example, the owner of copyright over a literary work grants an exclusive license to make out copies and distribute them within a specified territory, the grantee will practically step into the shoes of the owner/grantor and he enjoys the copyright to the extent of its grant to the exclusion of others. We may in this context usefully refer to the well-reasoned opinion expressed....
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....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 exploitation. Accordingly, the designs and drawings sold by the assesseetantamounts to the use of copyrighted article rather than use of a copyright and is, therefore, in the nature of business income. This issue of assessee's appeal is allowed.' 16. The similar issue was considered in the group case of the assessee in the case of Outotec Gmbh v. Dy. CIT (International Taxation) [2017] 87 taxmann.com 270 (Kol. -Tri....
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....o the final assessment order. b. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in granting the TDS credit for an amount of INR 63,67,842/- as against the TDS credit amounting to INR 77,76,574/- claimed by the appellant during the course of assessment proceedings. 16. In respect of rate of 40% plus surcharge and cess adopted by the Ld. AO while computing the tax liability, assessee claims that the treaty rate @10% as per the India-Finland DTAA ought to have been applied. It is submitted by the assessee that DRP while giving its direction had directed the Ld. AO to make the addition and tax @ 10% on gross basis. We find that taxability has arisen under the provisions of India-Finland DTAA. Also, despite the DRP direction, the rate of tax applied by the Ld. AO is as per the Act and not in terms of DTAA. Based on this factual observation, we direct the Ld. AO to recompute the tax liability by adopting the tax under the India-Finland DTAA which is stated to be @ 10% on gross basis. Accordingly, ground taken in this respect is allowed. 16.1. Further, assessee has claimed that levy of surcharge and cess on the income-tax ought not to ha....
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....t extract from the said decision are reproduced as under: "5. We find that the provisions of Articles 2, 11 and 12, which are relevant for our present purposes, are as follows: ARTICLE 2 : TAXES COVERED 1. The taxes to which this Agreement shall apply are : (a) in India income-tax including any surcharge thereon (hereinafter referred to as "Indian tax") ; (b)in Singapore : the income-tax (hereinafter referred to as "Singapore tax"). 2. The Agreement shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws. ARTICLE 11 : INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to t....
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....ncome-tax", so as to fulfil the commitment of the Government to provide and finance universalised quality basic education, calculated at the rate of two per cent of such income -tax and surcharge. (emphasis by underlining supplied by us) 8. It is thus clear that the education cess, as introduced in India initially in 2004, was nothing but in the nature of an additional surcharge. It was described as such in the Finance Act introducing the said cess. 9. We have also noted that Article 2(1) of the applicable tax treaty provides that the taxes covered shall include tax and surcharge thereon. Once we come to the conclusion that education cess is nothing but an additional surcharge, it is only corollary there to that the education cess will also be covered by the scope of Article 2. Accordingly, the provisions of Article 11 and 12 must find precedence over the provisions of the Income Tax Act and restrict the taxability, whether in respect of income tax or surcharge or additional surcharge - whatever name called, at rates specified in the respective article. In any case, education cess was introduced by the Finance Act 2004, with effect from assessment year 2005-06 whi....