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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 ..... ing 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 out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 designs and drawings to Indian customers is taxable in India as the same is in the nature of royalty under the provisions of the Act as well as under the DTAA. The findings of the Assessing Officer/DRP on this issue are summarised below: 1. Supply of design and drawings would not constitute 'sale of goods' as only license to use such design and drawings for specific purpose is granted to Indian customers and no title in the designs and drawings is transferred. 2. The judgment of Hon'ble Supreme Court in the case of Scientific Engineering [157 ITR 86] relied upon by the appellant deals with the capitalization of assets in the books of purchaser and has no applicability in the case of the appellant. 3. Agreement with Tata Steel - Sukhinda states th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] * 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 come as bottleneck to tax the income from designs and drawings as fee for technical services. 5. On the issue of taxability of income from rendering of testing and other services, the Assessing Officer held that, the same is taxable as royalty/FTS, both under the Act as well as under the DTAA for the following reasons: 1. As per Para 1 and Para 2 of Article 12 of the DTAA, the first right of taxing royalty/FTS goes to the resident state i.e. Finland, however, the source country can also tax royalty/FTS at the preferential rate of 10%. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 where its office/laboratories are located and submitted that none of the employees of the assessee had visited India to provide these services to the Indian customers. He relied on the specific wording in Paragraph No.5 of Article 12 of the DTAA between India and Finland and submitted that while the general rule is that royalty and fees for technical services would be taxed in the sourced country, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, commissioning and demonstration of performance tests etc. for Chromite Tailing Retreatment Plant of capacity 50TPH minimum or 70TPH maximum conforming to the Technical Specification and as per the scope of work as defined in Schedule 1 of this Agreement at TATA STEEL Works at Sukinda, Odisha. 14. A c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 . (Emphasis supplied) Since the assessee supplied the designs and drawings for setting up plants in India, in light of the above judgment, such designs and drawings partake the character of a product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver 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 copyright and is therefore in the nature of business income. Reliance in this regard is also placed on Commentary on Double Tax Conventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputer 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 program to the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity to enjoy any or all the of the enumerated rights ingrained 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers have been largely designed on the basis of standard technologies available with it. The consideration was, therefore, 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. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. [Emphasis ours] 19. The first 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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