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TMI Blog2019 (6) TMI 777X X X X Extracts X X X X X X X X Extracts X X X X ..... nd drawings; (ii) rendition of technical services; (iii) license fees; and (iv) testing and other services." 3. The assessee company filed its return of income on 26.11.2015 declaring total income of Rs. 1,89,38,136/-. It offered to tax income from rendition of technical services of Rs. 1,82,71,454/- and income from royalty(licence fees) of Rs. 6,66,682/-. It did not offer to tax income received from the sale of designs and drawings of Rs. 2,80,87,244/- and income from rendering testing and other services of Rs. 3,36,21,283/-. The assessee's case is that, income from sale of designs and drawings is a sale of copyrighted article and the income derived therefrom is business income and as the assessee does not have a permanent establishment in India, and hence the business profits are not taxable in India. On the issue of income from rendering of testing and other services, the assessee company relies on Article 12(5) of the India-Finland DTAA and as the services, in question, had been rendered outside India, it claimed that the same is not taxable in India. 4. The Assessing Officer did not agree with these contentions of the assessee. He held that the income earned from sale of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract for services of highly skilled and technical nature and accordingly fall under purview of technical service taxable u/s 9(1)(vii) of the Act as well as Article 12 of the DTAA. 6. Appellant's reliance on the decision of appellant's group company's Outotec GmbH's case is not appropriate in the present case as the said decisions were challenged by revenue before the Hon'ble High Court of Calcutta which is pending for adjudication. 7. Reliance was placed on following decisions to substantiate the contention that income from sale of design and drawings tantamount to Fees for technical services:- * POSCO Engineering & Construction Co. Ltd vs. Addl. CIT [42 taxmann.com 500] * Linde AG vs DIT [44 taxmann.com 244] * Hindustan Shipyard Ltd. vs. ITO [18 Taxmann.com 89] * Mannesman Demag Sack AG vs ACIT [119 TTJ 543] * In re, GMP International GmbH [321 ITR 411] 8. In interpreting the DTAA, specific provisions such as royalty and technical services should be given precedence over general provisions like Article 7 which deals with business income. Thus, absence of permanent establishment in India in connection to supply of designs and drawings will also not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rritory of India for consideration which was also received outside India in foreign currency. He submitted that similar issue on identical set of facts has come up before different Benches of ITAT in the case of the assessee's group concerns i.e. Outotec GmbH for the Assessment Year 2010-11 and 2011-12 and issue was adjudicated in his favour. He pointed out that the both the contentions of the Assessing Officer that, the income in question is royalty or in the alternative is fees for technical services was considered by this Tribunal in the above referred cases and was adjudicated upon, in favour of the assessee. He took this bench to each of these orders and submitted that the Assessing Officer was wrong in stating that the facts of these cases are not identical to that of the facts of the assessee's case. He submitted that the ratio of the decision in the assessee's group case has to be applied and the additions in question is to be deleted. 8. On the issue of taxability of income from rendering of testing and other services, he submitted that the undisputed fact is that the testing and other services have been carried out outside of the country by the assessee i.e. in Finland ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the assessee rendered the services outside the country, it does not take away the right of source country to tax this amount. He distinguished the interpretation of the ld. Counsel for the assessee on this issue and relied on the order of the Assessing Officer /DRP and submitted that the same be upheld. 11. Both parties agreed with the Ground Nos.4 & 5 as consequential in nature and that Ground No.6 is premature. 12. Rival contentions heard. On a careful consideration on the facts and circumstances of the case, perusing the papers on record and orders of the authorities below as well as case laws cited, we hold as follows. 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, commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the purpose of rendering such documentation service by supplying these documents to the assessee was to enable it to undertake its trading activity of manufacturing the odolites and microscopes and there can be no doubt that these documents had a vital function to perform 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 know-how 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". (Emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a product. It was explained that the nature of retaining intellectual property in designs and drawings, due to which the ownership has never passed on to the buyer, is similar in nature to the retaining of patented rights in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogram, for example on to the user's computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs 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 Article 7. 14.2 The method of transferring the computer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngrained in a copyright. Where the purpose of the licenceors the transaction is only to establish access to the copyrighted product for internal business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, for the sale of the product, which is embedded in the plant set up by the Indian customers and does not constitute 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 assessee tantamounts 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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, 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. 22. The assessee argues that the technical services of testing is performed outside the country, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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