Part II
In the first part of the article published in December 2010
issue of BCAJ, we discussed broadly the issues which arise while making payments
for designs and drawings acquired from foreign entities for diverse business
purposes, definitions of the terms Royalty and Fees for Technical Services (FTS)
under the Income-tax Act, 1961 (the ACT), under Model Conventions and under some
important Indian DTAAs. We also discussed meaning of the terms ‘design’,
technical and plan, as per various dictionaries.
In this part, we will discuss taxability of the payment for
technical plans and technical design with reference to various judicial
pronouncements with a view to understand how the case law has developed over the
years and to cull out guiding principles.
Taxation of Payment for Technical Plan or
Technical Design as explained in various judicial
pronouncements :
Taxation of Payments for Technical Plan or Technical Design
has been examined, explained and applied by various judicial authorities in
India
A gist of relevant cases is given below. It is important to
note that in the gist of cases given below, we have only considered and analysed
the aspect relating to taxation of payments for Technical Plan or Technical
Design. Other aspects relating to royalty, FTS, PE, etc. have not been discussed
or analysed here. For this, the reader should consider and refer the text of the
decisions.
1. CIT v. Davy Ashmore India Ltd. (Cal.)
(1991) 190 ITR 626 (India-UK DTAA) :
Nature of payment :
Import of concept designs and drawings for enabling the
assessee to prepare the detailed manufacturing drawings for purposes of
manufacture of the terminal equipments which were required to be supplied by the
assessee.
Issue :
Whether the payment made to the non-resident company were in
the nature of royalty within the meaning of Explanation 2 to S. 9(1)(vi) ?
Held :
That the non-resident did not retain the property in the
designs and drawings. The designs and drawings were imported under the import
policy with the approval of the RBI on the basis of the letter of intent. The
import of the designs and drawings postulated an out and out transfer or sale of
such designs and drawings. The consideration paid for the transfer was not
assessable as royalty.
2. CIT v. Klayman Porcelains Ltd. (AP)
(1998) 229 ITR 735 (India-Germany DTAA) :
Nature of payment :
Under the agreement, consideration was paid for
construction/installation of a kiln. The amount paid under that memorandum by
the Indian company to the non-resident company was payment for technical
drawings towards engineering for the kiln.
Issue :
Whether the lump sum payment made by the resident company to
the non-resident company for supply of designs and drawings (engineering for the
kiln) did not constitute ‘income’ by way of royalty of the non-resident company,
within the meaning of the provisions of S. 9(1)(vi) ?
Held :
The Tribunal on construing the relevant portion of the
agreement recorded the finding that this was a case of a foreign company
undertaking to supply, erect and commission a kiln in India, the only service
rendered in India being that of supervision by an expert deputed by the foreign
company. The amount was not paid for imparting any information concerning the
working of, or the use of, a patent, invention, model, design, secret formula or
process or trade mark or similar property falling under clause (ii) of
Explanation 2 to S. 9(1)(vi) or for imparting of any information concerning
technical, industrial, commercial or scientific knowledge, experience or skill
within the meaning of clause (iv) of Explanation 2. A close reading of the
second type of work as well as the other items of the memorandum showed that the
consideration was paid for construction/installation of the kiln. Therefore, the
payment made by the assessee to the non-resident company did not constitute
‘income’ by way of royalty of the non-resident company, within the meaning of
the provisions of S. 9(1)(vi) of the Act.
3. Leonhardt Andra Und Partner, GmbH v. CIT
(2001) 249 ITR 418 (Old India-Germany DTAA) :
Nature of payment :
Payment was made to the German company in connection with the
design of the bridge to be built.
Issues :
1. Whether the sums received by the assessee for design and
technical services for the construction work are chargeable to income-tax under
the Act ?
2. Whether the transfer of the drawings, designs and
technical services under the collaboration agreement constituted an out and out
transfer of such rights and as such the sums received therefor could be treated
as royalty for the purpose of the Indo-German DTAA and liable to Indian
Income-tax ?
3. Whether, the sum received by the assessee for the supply
of designs, drawings and technical services constituted ‘industrial and
commercial profits’ for the purpose of the Indo-German DTAA and, as such, the
same is assessable under the Act ?
Held:
Royalty was not defined in the old India-Germany DTAA and was
not included within the term ‘industrial and commercial profits’. The term
‘royalty’ not being defined in the DTAA, the definition in the Act would
prevail. Therefore, the sums received by the assessee for design and technical
services for the construction work were in the nature of royalty within the
meaning of the term in S. 9(1)(vi) of the Act, which was taxable and did not
constitute industrial and commercial profits. The fact that the assessee had no
permanent establishment in India was of little consequence.
Note :
CIT v. Davy Ashmore India Ltd., (1991) 190 ITR 626 (Cal.) was distinguished on the ground that as royalty was not defined in the Old India-Germany DTAA and as such the statutory provision will prevail.
4. Munjal Showa Ltd. v. ITO, (2001) 117
Taxman 185 (Delhi) (Mag.) (India-Japan DTAA)
Nature of payment:
The Japanese company undertook to provide to assessee technical know-how and services in connection with manufacture of shock absorbers. The assessee sought drawings and designs of equipments in order to fabricate plant and machinery in India and the Japanese company charged a sum towards cost of supplying the same.
Issue:
Whether such supply of drawings and designs was an outright sale in the Japanese company’s hands and purchase in the assessee’s hands, and, accordingly, consideration paid was commercial profit of Japanese company within meaning of Article III(1) of DTAA?
Held:
The ITAT held that:
5. Pro-Quip Corporation — AAR
(2002) 255 ITR 354 (India-USA DTAA):
Nature of payment:
Linde Process Technologies (India) Ltd. (LPT) received a purchase order from another Indian company for design, engineering technical know-how and erection and commissioning of hydrogen generation plant. As part of execution of the project, LPT was required to obtain and supply the engineering drawings and designs for the setting up of the plant.
The engineering drawings and designs were available with?Pro-Quip?Corporation, USA, the applicant. LPT placed a purchase order with the applicant for the purpose of specified engineering drawings and designs for the construction of hydrogen generation plant for the Indian company.
Issue:
Whether the applicant is liable to tax on the amount received from Linde Process Technologies (India) Ltd. towards consideration for the sale of engineering, drawings and designs received under purchase order of Linde Process Technologies (India) Ltd.?
Held:
The AAR held that:
6. Gentex Merchants (P.) Ltd. v. DDIT(IT)
(2005) 94 ITD 211 (Kol.) (India-USA DTAA):
Nature of payment:
The assessee-company entered into an agreement with a US company for development of water features at premises owned by it. Under this agreement, the US company was not only to provide schematic ideas but also to provide technical designs, drawings and information, on basis of which the assessee was to execute and install water features. Moreover, the US company was to ensure that features executed by contractors at site conformed to drawings, designs specifications provided by it.
Issue:
Whether since the US company was required to deliver technical designs or plan for sole use by the assessee-company in India, payments effected under agreement squarely fell within definition of ‘fees for technical services’ mentioned in Article 12(4)(b) of India-USA DTAA?
Held:
The ITAT held that:
7. Indian Hotels Company Ltd. v. CIT [IT Appeal No. 553 (Mum.) of 2000, dated 14-12-2005] India-Singapore DTAA:
[Decision not yet reported. However, the same has been cited with approval in the case of Abhisek Developers v. ITO, (2008) 24 SOT 45 (Bang.) (URO).] The relevant portion cited in the decision of Abhisek Developers is reproduced below. “The facts of the case on hand are identical with the facts of the case dealt by the Mumbai ‘B’ Bench of the Tribunal in IT Appeal No. 553 (Mum.) of 2000, order dated 14-12-2005 in the case of Indian Hotels Co. Ltd. v. ITO, wherein at para 7 it is held as follows: “A careful reading of the above clauses of the agreement between the assessee company and M/s. HBA clearly shows that the fees payable to M/s. HBA are neither fees paid for technical services nor are in the nature of royalty as defined in various articles of the DTAA between India and Singapore. As per the various clauses of the said agreement it is clear that?M/s. HBA has to hand over and transfer all layout plans and interior concepts in regard to the areas defined in the agreement and all the interior design, drawings and presentation material shall become the property of the assessee-company. All design work submitted by M/s. HBA is for the use solely on this project and cannot be used as part of any other design and the transfer of property in the interior design, drawing, presentation material shall take place in Singapore. It is specifically provided in clause 4.5 of the agreement that all interior design, drawing and specifications shall become the property of the client and the same shall be used for any other purpose other than that covered by this agreement by the interior designer. The services were only to create ‘design’ and title in the design, etc. has passed in this case to the assessee-company. In these facts of the case, we hold that the fee payable to M/s. HBA is not a fee for technical services and is not in the nature of royalty as per the articles of DTAA between India and Singapore and therefore, the assessee was not liable to deduct tax from remittances to M/s. HBA (P.) Ltd. The assessee-company has purchased and acquired interior design and drawing from M/s. HBA and the property therein has in fact passed to the assessee-company. In this view of the matter, the issue is decided in favour of the assessee and the grounds of appeal of the assessee are allowed.”
8. DCIT v. All Russia Scientific Research
Institute of Cable Industry, Moscow
(2006) 98 ITD 69 (Mum.)
(India-Russian Federation DTAA):
Nature of payment:
The assessee, a Russian company, possess-ing knowledge and experience in the field of manufacturing technique of a particular product, entered into an agreement with IPL, an Indian company under which the assessee-company was to provide to IPL a “non-exclusive right to use the ‘know-how’ for the purpose of realisation of the process and the technical process and the special process in the territory and sell the licensed product and the special product in the territory and zone of non-exclusive right”. Under this arrangement, the assessee was, upon a request from the IPL, to render ‘technical assistance’.
Issue:
Whether or not the payment in consideration of supply of technical documentation, on the facts of this case, is to be treated as ‘royalty’ or not?
Held:
The ITAT held that:
In the next part of the Article, we shall discuss some more judicial decisions on the subject.