2009 (10) TMI 40 - AAR - Income Tax

Fee for technical services versus royalty section 5(2), 9(1)(i) and article 12(5) of DTAAA with USA - business of supplying advance technology for the manufacture of radial tyres - a perpetual irrevocable right to use the know-how as well as to transfer the ownership in tread and side-wall designs and patterns required for the manufacture of radial tyres for a lump sum consideration of US 7,10,220 held that - the sum of USD 343,425 representing consideration for the transfer of know-how and the grant of right to use the know-how can be subjected to tax in India, treating the same as deemed income by way of royalty - the amount of consideration related to the transfer of ownership in the tread and side wall designs/patterns amounting to USD 218,405 cannot be subjected to tax. However, the consideration for product development, totaling 148,390 USD stands on the same footing as transfer of know-how and is liable to be taxed under the Income-tax Act withholding rate of tax is 10% plus surchase

Issues Involved:
1. Taxability of consideration for the transfer of documentation under the Technology Transfer Agreement.
2. Taxability of consideration for consultancy and assistance under the Technology Transfer Agreement.
3. Rate and amount of tax to be withheld under Section 195 of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Consideration for the Transfer of Documentation:

The applicant, a US-based company, entered into a Technology Transfer Agreement with an Indian company, CEAT Limited, to transfer technical documentation and designs for the manufacture of radial tyres. The applicant contended that the transaction involved the sale of technical documentation outside India, and thus, the income should not be taxable in India under Section 5(2) or Section 9(1)(i) of the Income-tax Act, 1961. The applicant also argued that the transaction did not fall under the definitions of 'royalty' or 'fees for technical services' as per the Act or the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

The Revenue argued that the income received by the applicant is covered under Article 12 of the DTAA as 'royalty' and 'fees for included services' and is therefore taxable in India. The Revenue also suggested that the applicant might have a service PE in India due to the activities undertaken under the Agreement.

The Authority examined the Agreement and noted that the transaction is not merely a sale of technical documentation but involves the transfer of the right to use the know-how, which is covered under the definition of 'royalty' in Section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA. The Authority concluded that the consideration received for the transfer of know-how and the right to use it is taxable as royalty in India.

2. Taxability of Consideration for Consultancy and Assistance:

The Agreement also included provisions for consultancy and assistance services, including training, which the applicant argued should not be taxable as 'fees for included services' under the DTAA. The Authority examined the nature of these services and concluded that they fall within the definition of 'fees for included services' under Article 12(4) of the DTAA, as they make available technical knowledge, experience, skill, know-how, or processes to CEAT. The Authority emphasized that these services are essential for CEAT to effectively use the transferred know-how and are therefore taxable in India.

3. Rate and Amount of Tax to be Withheld under Section 195:

The Authority referred to Section 195(1) of the Income-tax Act, which mandates the deduction of tax at source on payments to non-residents that are chargeable under the Act. The applicable rate for royalty and fees for technical services as per the Finance Act, 2009, is 10% plus surcharge. The Authority concluded that the tax should be withheld at this rate on the amount receivable under the contract, excluding the consideration for the transfer of ownership in Tread and Sidewall design/patterns, which is not taxable as royalty.

Conclusion:

The Authority ruled that the consideration for the transfer of know-how and the right to use it is taxable as royalty in India. The consultancy and assistance fees are taxable as 'fees for included services' under the DTAA. The tax should be withheld at the rate of 10% plus surcharge on the amount receivable under the contract, excluding the consideration for the transfer of ownership in Tread and Sidewall design/patterns.

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