TaxTMI 
TaxTMI 
2026 (3) TMI 1266
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.... is engaged in designing of bridges. The assessee entered into Sub-Consultancy Agreement dated 22.12.2017 with Systra MVA Consulting (India) P. Ltd. (in short 'Systra India') for providing consultancy services in relation to Versova-Bandra Sea Link Project. The scope of services inter alia includes preparation of Tender design (hereinafter referred to as 'Design Support Services'). In lieu of providing Design Support Services, the assessee was entitled to receive professional fees from Systra India Rs. 2,10,21,587/-. The assessee claimed that the professional fee received is not chargeable to tax in India, as the assessee has no Permanent Establishment (PE) in India. The fact of assessee having no PE in India has not been disputed by the Department. During the course of Draft Assessment proceedings, the Assessing Officer (AO) came to the conclusion that the professional fee received by the assessee in lieu of provision for Design Support Services is in the nature of 'royalty', hence, taxable in India under section 9(1)(vi) of the Act as well as under provisions of the DTAA. Against the Draft Assessment Order dated 24.03.2024, the assessee filed objections before the Dispute Resolut....
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....IT vs. DCM Ltd. in ITA no.87-89/1992 decided on 10.03.2011 and decision of Tribunal in the case of DCIT vs. Kalpataru Power Transmission Ltd. 149 taxmann.com 484 (Ahd-Trib.). 5. Per contra, Shri M.S Nethrapal representing the department vehemently defending the impugned order prayed for dismissing appeal of the assessee. The ld. DR furnished detailed written submissions, the same are reproduced herein below:- "1. The present legal submission is formulated to articulate the Department of Revenue's definitive stance regarding the taxability of remittances made by the Assessee, an Indian entity, to International Bridge Technologies Middle East DMCC (hereinafter referred to as the "UAE Entity" or "SYSTRA IBT"). The dispute arises from the characterization of payments made for the design, drawing, and engineering of the Versova Bandra Sea Link (VBSL). While the Assessee contends that these payments constitute business profits or fees for technical services-which, in the absence of a Permanent Establishment (PE) and a specific Fees for Technical Services (FTS) clause in the India-UAE Double Taxation Avoidance Agreement (DTAA), would escape taxation in India-the revenue po....
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....ent high-value "scientific and industrial experience" (Know-How) and unique "artistic work" protected by copyright. 6. Scope of Work and Deliverables- Appendix 1 of the Agreement details the "Services to be performed by Systra IBT." A review of these deliverables reveals that the contract is for the supply of specific intellectual property assets rather than generic services: Deliverable Type Contractual Description Implication for "Royalty" Classification Concept Design Plans Preparation of "Concept design plans, Sections and Elevations of the Main Bridge (Cable Stayed Bridge, Balanced Cantilever Bridge and ..Marine viaduct) & Connectors". This constitutes a "Design" and an "Artistic Work" (Architectural drawing) under the Copyright Act. Payment is for the creation and use of this specific design. Technical Blueprints "General Arrangement Drawings and cross section drawings... Pile foundation drawings showing the proposed diameter and tip, elevation". These constitute "Plans" within the specific meaning of Article 12(3) of the DTAA ("use of... plan"). They are the instruction set for the bridge. Engineering Calculations "Design (including ....
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....um Fees). The Revenue asserts that a portion of this lump sum is explicitly attributable to the license granted in Article 13. Without the payment under Article 9, the License under Article 13 would not be granted. Therefore, the payment is consideration for the license. 8. Remuneration Structure (Article 9) Article 9.1 specifies a "lump sum fees of USD 307,600 and Euro 16,486.76".' Article 9.2 states this includes "producing, and reproducing deliverables." This phrasing-"reproducing deliverables"-is significant. It aligns with the Revenue's argument that the payment is for the right to reproduce the work (the design) in the form of the bridge. 9. Statutory Framework: The Definition of Royalty The characterization of the income relies on the interplay between the domestic Income Tax Act and the India-UAE DTAA. Income Tax Act, 1961 (Section 9(l)(vi)) Section 9(l)(vi) deems royalty to accrue in India. Explanation 2 defines "Royalty" widely to include consideration for: (i) the transfer of all or any' rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or pr....
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....ght" itself. This argument is legally flawed in the context of architecture due to the unique provisions of the Copyright Act, 1957. Architectural Works as "Eristic Works" Section 2(c) of the Copyright Act, 1957 defines "artistic work" to include: (i) a painting a sculpture, a drawing (including a diagram, map, chart or plan)... (ii) a work of architecture.. Thus, the bridge designs provided by the UAE Entity are "artistic works" protected by copyright. The Meaning of "Reproduction" in Architecture Section 14 of the Copyright Act grants exclusive rights to the copyright owner. The rights differ based on the nature of the work * Literary Works (e.g.. Software/Books): The right to reproduce involves making copies of the code or text. Merely reading a book or running software is not reproduction. * Artistic Works (e.g., Architecture): Section 14(c)(i) explicitly grants the owner the exclusive right "to reproduce the work in any material form including... depiction in three- dimensions of a two-dimensional work." When the Indian Assessee takes the 2D architectural drawings (the design) and constru....
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....ct amounts to the imparting of technical know-how/use of a plan, and is thus taxable as Royalty.1 This supports the view that "plans" are distinct royalty-generating assets. 12. The "Scientific Experience" Argument Article 12(3) also includes payment for "information concerning industrial, commercial or scientific experience" (Know-How). Designing a bridge like the VBSL requites deep "scientific experience" regarding: * Geotechnical behavior of marine soil. * Wind tunnel analysis for cable-stayed structures. * Corrosion resistance in saline environments. * Load-bearing physics for balanced cantilevers. When the UAE Entity provides the "Design Basis Report" and "Engineering Calculations" they are imparting this scientific experience to the Indian entity. The Indian entity uses this experience to ensure the bridge stands. This transfer of knowledge fits the "Know-How" limb of the Royalty definition. 13. Distinguishing the Supreme Court's Ruling in Engineering Analysis The Assessee will undoubtedly place heavy reliance on the Supreme Court judgment in Engineering Analysis Centre of Excellence....
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.... clause (at the time) or they had no PE, it wasn't taxable. * High Court's Holding: The Court held the payments were Royalty. * Rationale: The Court rejected the "outright sale" theory. It found that the foreign company retained proprietary rights in the designs (similar to Article 13 of the IBT contract). The payment was for the use of these designs to build the bridge. The provision of designs was deemed to be "imparting of information concerning the working of or the use of a design/model/plan." * Relevance: This case is factually identical (Bridge Design) and legally binding (High Court level)? It establishes that bridge design fees are Royalty, not just business profits. Gentex Merchants (P.) Ltd. v. DDIT (ITAT Kolkata) Although this case was decided under the US Treaty (which has an FTS clause), its findings on the nature of "Design Transfer" are crucial. * Facts: An Indian company paid a US firm for designs of water features (fountains / landscaping). * Finding: The Tribunal held that providing technical designs and drawings constitutes the ''transfer of a technical plan or design?' It rejected the argume....
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....rk" (specifically the right to reproduce the work in 3D form under Section 14(c) of tire Copyright Act). 3. Binding Precedent: The Calcutta High Court in Leonhardt Andra provides a direct and binding precedent that bridge design, fees are Royalty. 4. Distinction: The Engineering Analysis judgment is inapplicable as it pertains to software where no right of reproduction is granted, whereas architectural contracts inherently grant the right to reproduce (construct) the work. Prayer: The Department of Revenue respectfully prays that the Hon'ble income Tax Appellate Tribunal hold the payments made to International Bridge Technologies Middle East DMCC as Royalty, taxable at the rate of 10% under Article 12 of the India-UAE DTAA, and confirm the demand raised against the Assessee." 6. Submissions made ld. Counsel for the assessee heard, written submissions filed on behalf of the Department perused. We have also examined the impugned order and the directions of the DRP. The solitary issue raised by the assessee in appeal is against findings of the AO in characterizing the payment received by the assessee from Systra India amounting to Rs. 2,10,21....
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....g tendering and pre award / post tendering stage. * Design and drawings of structures as proposed in the tender documents to establish quantities within reasonable accuracy. Details for structures to include member sizing to establish quantities within reasonable accuracy for these items. Typical reinforcement and pre-stressing details will be presented in drawings/ sketches as part of design reports. The estimated accuracy (%) of quantities for main items shall be discussed with and reported to the Client by the design subcontractor. * Justification of the main structural member such as concrete, prestressed tendon, structural steel and reinforcement shall be provided. * Schematic construction sequence for Main Bridge (Cable Stayed Bridge and Balanced Cantilever Bridges, Marine viaduct) & Connectors based on Clients evaluation and selection of preferred construction methods. The design output shall also include the global reinforcement due to the structural system between bridge completion stage and construction stage. * Provision of expert advice related to need for any site exploratory works during tender phase and structural related aspects. ....
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.... to the SYSTRA IT in the performance of the Services. DELIVERABLES The transfer of the documents to L&T / SAMSUNG - JV will be through L&T's File Transfer Protocol (FTP) server and emails. * Type, size and location drawings for the bridges as described in the tender documents, showing the geometry of the Main Bridge (Cable Stayed Bridge, Balanced Cantilever Bridge and Marine viaduct) & Connectors of Versova Bandra Sea Link This includes: ➢ Design Basis Report for Main Bridge (Cable Stayed Bridge, Balanced Cantilever Bridge and Marine viaduct) & Connectors. ➢ Concept design plans, Sections and Elevations of the Main Bridge (Cable Stayed Bridge, Balanced Cantilever Bridge and Marine viaduct) & Connectors. ➢ Bill of Quantities (BOQ) as per the Client's requirement and format including all the items required for complete scope of work included in the tender documents for Main Bridge (Cable Stayed Bridge, Balanced Cantilever Bridge and Marine viaduct) & Connectors. ➢ Plan & Profile GA drawings, Overall Layout plans showings key dimensions (Bridge Profile showing the pavement surface profil....
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....oyalties or other payments in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources." 11. There is subtle difference in consideration received for sale of design and drawings and consideration received for the use of or the right to use design. Former is a case where ownership in the drawings and design specific to the project is transferred. Whereas, in later case, the ownership of design remains with the creator of design and it only authorizes use of design or the right to use of design. The payments received in later case are in the nature of 'royalty'. 12. In the case of Gera Development P. Ltd. vs. DCIT (supra), the Coordinate Bench in a case where the consideration received by the assessee was for transfer of architectural drawings and design for a particular commercial complex, the Department characterized such consideration as 'royalty'. The Tribunal held as under:- "24. A perusal of the definition of "Royalty" as defined under Article 12(3) of India-USA DTAA would show that the payment made by assessee to Gensler were not in the nature of consideration for transfer of or right to use any copyright of a scienti....
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....tion for the services that will result in the development of that design, model or plan and would thus fall under article 7. This will be the case even if the designer of the design, model or plan (e.g. an architect) retains all rights, including the copyright, in that design, model or plan. Where, however, the owner of the copyright in previously-developed plans merely grants someone the right to modify or reproduce these plans without actually performing any additional work, the payment received by that owner in consideration for granting the right to such use of the plans would constitute royalties" 7.11 It may be relevant to take note of the relevant clauses of the agreement entered into with the clients to appreciate the correct position regarding transfer of copyright and ownership of the intellectual property. The clause "ownership of documents copyright" as per agreement with L&T reads as under :- "After the completion of the project or the termination of the design consultant's employment, copyright in all documents, drawings, reports and specifications prepared by the Design consultant (soft copies as well as editable versions including ACAD, REV IT,....