2016 (4) TMI 41 - AT - Income Tax

Business income/profits taxable in India as per the DTAA - payment made towards BEDS package for the refinery at Visakhapatnam - tds liability - whether payment is towards purchase of capital asset, that it was not for FIS, as contemplated under Article -12 of DTAA - Held that - If an assessee makes payment for basic engineering program or basic design to a non-resident entity and the supplier does not have a PE in India, such payments would not be taxed in India. If the assessee purchases BEDP out rightly it would amount to purchase of capital asset. But, if the payment is made for use of property rights the payments has to be taxed as Royalty. There is conceptually difference in payment made for use of certain rights for a certain period and payment made for acquiring basic designing. In the case under consideration, it is clear that the assessee had treated other two payments as Royalty and had deducted tax at source, that the American-company had provided the assessee basic engineering design to set up a plant, that designing work was not carried out in India and the payment was also made outside India. Therefore, in our opinion, the assessee was not liable for deducting tax at source for the said payment. The agreements cannot be treated a part of a composite agreement-one agreement is for supply of basic designing to set up a plant and others are for use of property-rights. Reversing the order of the FAA, we hold that payment in question was neither royalty nor FTS. - Decided in favour of assessee

Issues Involved:
1. Taxability of payments for Basic Engineering Design Specification (BEDS) under the head Fee for Technical Services (FTS) or Royalty.
2. Applicability of education cess on payments under DTAA.
3. Classification of payments for technical services and capital assets under DTAA.

Issue-wise Detailed Analysis:

1. Taxability of payments for Basic Engineering Design Specification (BEDS) under the head Fee for Technical Services (FTS) or Royalty:

The assessee entered into a license and engineering agreement with a US company for the CCR platforming processing unit, involving payments for royalty, basic engineering design, and training. The assessee argued that the payment for basic engineering design was for procuring a capital asset and not FTS. However, the AO held that the design was made per the assessee's specifications, involving various stages of collaboration, and thus classified it as Fee for Included Services (FIS), requiring TDS at 17.25%.

Upon appeal, the First Appellate Authority (FAA) upheld the AO's decision, stating that the basic design and engineering activity was part of technological information under Article 12(4)(a) of the India-US Tax Treaty and thus taxable as Royalty/FIS.

The Tribunal, however, referred to several cases, including Indian Oil Corporation Ltd., Modern Threads(I) Ltd., and Finoram Sheets Ltd., which established that payments for basic engineering design packages, when not involving a PE in India, should not be taxed as royalty or FTS. The Tribunal concluded that the payment for BEDS was for acquiring a capital asset and not for the use of property rights, thus reversing the FAA's order and deciding in favor of the assessee.

2. Applicability of education cess on payments under DTAA:

The assessee contended that education cess should not be applicable where DTAA provisions are in force, referring to Circulars No. 333 and 728 issued by the CBDT. The Tribunal did not specifically address this issue in detail but implicitly supported the assessee's stance by reversing the FAA's order, which included the cess.

3. Classification of payments for technical services and capital assets under DTAA:

The Tribunal examined similar agreements and payments in other cases, determining that payments for basic engineering design packages are considered capital assets and not technical services or royalty. The Tribunal emphasized the distinction between payments for the use of property rights and those for acquiring basic design, concluding that the latter should not be taxed as FTS or royalty under the DTAA.

Separate Judgments:

ITA No. 7679/Mum/2007:
The assessee entered into an agreement with Belco Technologies Corporation Ltd., USA, for BDEP for the EDV wet scrubbing system. The AO and FAA classified the payment as FTS. The Tribunal, following its earlier decision, held that the payment for acquiring a capital asset was not liable to taxation, deciding in favor of the assessee.

ITA No. 7680/Mum/2007:
The assessee's agreement with Technip KTI SPA, Italy, involved payments for BDEP, license fee, and consulting assistance. The AO and FAA classified the BDEP payment as royalty/FTS. The Tribunal, consistent with its earlier ruling, held that the BDEP payment was not taxable as royalty/FTS, deciding in favor of the assessee.

ITA No. 7681/Mum/2007:
This appeal involved another payment to Belco. The Tribunal, following its decision in ITA No. 7679/Mum/2007, ruled in favor of the assessee.

Conclusion:
All appeals filed by the assessee were allowed, with the Tribunal consistently ruling that payments for basic engineering design packages are not taxable as royalty or FTS under the DTAA, provided there is no PE in India. The Tribunal's decision emphasized the nature of such payments as capital assets rather than technical services.

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