By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
fiogf49gjkf0d
New Page 3
2 Parsons Brinckerhoff India (P) Ltd. v. ADIT
(2008) 118 TTJ 214 (Del.)
S. 9(1)(vi), S. 195, Income-tax Act; Article 12,
India-Thailand DTAA
Dated : 4-7-2008
Issue :
Payment for outright sale of drawings and designs is not
royalty either u/s.9(1)(vi) or under Article 12(3) of DTAA.
Facts :
The assessee was an Indian company. It was engaged in the
business of rendering engineering, consultancy services and was awarded a
contract by a consortium for rendering such services for a tollway project.
Inter alia, the scope of work required preparation of design and drawings by
the assessee. The assessee entered into a contract, titled as service agreement,
with a Thailand company (‘ThaiCo’) for : supply of detailed design services,
including preparation and submission of fully dimensional general arrangement
drawings, segment casting data, etc.; calculations, drawings and reports,
rectification to design errors, etc.; site visits by ThaiCo as may be necessary;
design review for about 13 items; supply of detailed design; and production of
final design drawings. As per the contract, ThaiCo was to carry out the work
from its office in Thailand and for actual execution, its personnel may be
required to make short visits to the site. In particular, the contract
stipulated observance of confidentiality and non-disclosure of the assessee’s
trade secrets/confidential information as well as not using these either for its
own purpose or for benefit of any third person. It was further stipulated that
upon termination of the contract, ThaiCo shall surrender all the documents and
information relating to the assessee which may be in its possession. The
assessee was required to remit the contract consideration to ThaiCo in Thailand.
The assessee applied to the AO u/s.195(2) of Income-tax Act
requesting the AO to pass an order authorising remittance of the consideration
without deduction of tax. The assessee submitted that : the payment was in the
nature of business income and as ThaiCo did not have PE in India, it was not
taxable in India; the payment did not represent Fees for Technical Services (‘FTS’)
as there was no specific article dealing with FTS; and the payment could not be
construed as ‘other income’ under Article 22 of DTAA. The AO held that the
payment was for use of design/model/plan developed by ThaiCo and also that it
represented consideration for information concerning industrial, commercial or
scientific experience, and concluded that it was ‘royalty’ under Article 12 of
DTAA. In appeal, CIT(A) agreed with the conclusion of the AO.
Held :
The Tribunal observed that :
- Though the contract was titled as service agreement, actually it was agreement
for supply of the package of designs and drawings that would enable the
assessee to effectively render engineering consultancy services under its
contract with the consortium.
- The site visits of ThaiCo’s personnel seemed to be only to explain the
drawings and designs to the assessee and they were similar to the visit of a
machine supplier’s personnel to supervise the installation of machinery.
- Decisions in Pro-Quip Corporation v. CIT, (2002) 255 ITR 354 (AAR),
CIT v. Davy Ashmore India Ltd., (1991) 190 ITR 626 (Cal.), CIT v.
Klayman Porcelains Ltd., (1998) 229 ITR 735 (AP) and CIT v. Neyveli
Lignite Corporation Ltd., (2000) 243 ITR 459 (Mad.) have brought out the
distinction between outright sale of the property and transfer of
right to use the property while retaining the ownership right. In case of
outright sale, the consideration would be business profits and in case of
transfer of right to use, it would be royalty.
- There are a number of words used in Explanation 2(i) to S. 9(1)(vi)(b) and
Article 12(3) of DTAA and all these words signify a form or a kind of
intellectual property. The words ‘model’ or ‘design’ should be understood in
this context. Having regard to the rules of interpretation, it would not be
proper to hold that these two words should be understood in a different sense.
Therefore, these two words cannot refer to drawings and designs which are sold
outright without the seller retaining any proprietary right.
The Tribunal, accordingly, held that :
- an outright sale of drawings and designs cannot fall under the definition of
‘royalty’ in Explanation 2 to S. 9(1)(vi).
- As outright sale of drawings and designs is not ‘royalty’, ThaiCo is not
chargeable to tax in India u/s.9(1)(vi).
- Since no liability had arisen on the non-resident under the domestic law, it
is not legally necessary or permissible to examine DTAA.
- The payment would not be covered under Article 22 of DTAA, since the income is
business profits which are expressly dealt with in Article 7.
- The payment is not chargeable to tax in India.
