2019 (6) TMI 777 - AT - Income Tax

Income accrued in India - income earned from sale of designs and drawings to Indian customers - addition in nature of royalty under the provisions of the Act as well as under the DTAA - India-Finland DTAA - PE in India - HELD THAT - Copies of other Agreement for sale of drawings and designs have also been placed on record. A perusal of the same demonstrates that the designs and drawings, in question, are not embedded in the plant and machinery. They are separate items which were sold to the assessee. The fact that these were sold outside India is not disputed. Similar issue was decided in OUTOTEC GMBH AND OUTOTEC INDIA PVT. LTD. VERSUS DEPUTY DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION) -2 (1) , KOLKATA 2015 (6) TMI 609 - ITAT KOLKATA we hold that the income from sale of designs and drawings cannot be classified, either as royalty or as FTS. The income has to be considered as business income and as the assessee does not have PE in India, it cannot be brought to tax in India. - Decided in favour of assessee. Taxability of income from testing and other services - HELD THAT - 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. The income, in 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 India, i.e. the state in which the right or property is used. Referring to Assessee's argument that the technical services of testing is performed outside the country, i.e. in Finland and hence cannot be taxed in India in view of the exception curved out to Article 12(5) of the India-Finland DTAA exception in question is, when the fees is paid for technical services which are performed within a contracting state, then the income therefrom is deemed to accrue or arise within the state in which the services were performed. In our view, this Clause does not apply as the payment in question was made for the test results which were used within the contracting state, India. It may be true that the process of testing may have been conducted outside India. But the payment in question is not for the process but was for the results of testing which is used in India. The argument of the ld. D/R that these services were availed in India and hence are taxable in India has to be upheld. Hence, we agree with the finding of the Assessing Officer as upheld by the DRP on this issue. Ground of the assessee is dismissed.

Summary

Issues Involved:
1. Taxability of income earned from the sale of designs and drawings.
2. Taxability of income from rendering testing and other services.

Detailed Analysis:

1. Taxability of Income Earned from Sale of Designs and Drawings:

The assessee, a tax resident of Finland, earned revenue from various sources including the sale of designs and drawings to Indian customers. The primary contention was whether this income should be classified as business income or as royalty/fees for technical services (FTS) under the Income Tax Act and the India-Finland Double Taxation Avoidance Agreement (DTAA).

The Assessing Officer (AO) held that the income from the sale of designs and drawings was taxable in India as royalty under both the Act and the DTAA. The AO’s findings were based on the following points:
- The supply of designs and drawings did not constitute a 'sale of goods' as only a license to use these designs was granted, not the transfer of title.
- The intellectual property of the designs remained with the appellant, and the Indian customer was only granted a license to use them.
- The designs and drawings were protected by intellectual property rights and involved technical services, thus falling under the purview of royalty and FTS.
- The designs were tailor-made as per customer requirements and involved significant technical input, making them taxable under Section 9(1)(vii) of the Act and Article 12 of the DTAA.

The Tribunal, however, disagreed with the AO’s findings. It noted that similar issues in the group company’s cases (Outotec GmbH) were adjudicated in favor of the assessee. The Tribunal held that:
- The designs and drawings were sold outside India, and the consideration was received outside India in foreign currency.
- The designs and drawings were not embedded in the plant and machinery but were separate items sold to the Indian customers.
- The transaction was considered a sale of a copyrighted article rather than the use of a copyright, making it business income.
- As the assessee did not have a permanent establishment (PE) in India, the business profits were not taxable in India.

Thus, the Tribunal concluded that the income from the sale of designs and drawings should be classified as business income and, in the absence of a PE in India, it could not be taxed in India.

2. Taxability of Income from Rendering Testing and Other Services:

The assessee also earned income from rendering testing and other services, which were performed outside India (in Finland). The AO held that this income was taxable as royalty/FTS under both the Act and the DTAA, citing the following reasons:
- Article 12 of the DTAA allows the source country (India) to tax royalty/FTS at a preferential rate of 10%.
- The services were ultimately used in India, making the income taxable in India.
- Payments were in respect of permanent establishments (PEs) in India, thus taxable in India.

The Tribunal examined Article 12(5) of the India-Finland DTAA, which states that royalties or FTS are deemed to arise in a contracting state where the payer is located or where the services are performed. The Tribunal noted that:
- The testing services were performed outside India.
- The payment was for the test results used in India, not for the process of testing itself.

The Tribunal upheld the AO’s view, stating that the payment was for the results of testing used in India, making the income taxable in India. The argument that the services were performed outside India did not exempt the income from being taxed in India, as the results were used within the contracting state.

Conclusion:

The appeal was allowed in part. The income from the sale of designs and drawings was classified as business income and not taxable in India due to the absence of a PE. However, the income from rendering testing and other services was deemed taxable in India as the results of these services were used in India.