Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘F’ NEW DELHI
Before: SH. I.C. SUDHIR & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-XXIX, New Delhi, dated 25.07.2013, for assessment year 2005-06, raising the following grounds of appeal: “The following grounds of appeal are independent of, and without prejudice to one another: (1) That on the facts and circumstances of the case & in law, the learned Commissioner of Income Tax (Appeals) grossly erred in treating the receipts of the appellant from sale of designs and drawings as royalty under the provisions of section 9(1)(vi) of the Income Tax Act, 1961 (‘Act’) as well as Article 12(3) of Double Taxation Avoidance Agreement (“Tax Treaty”) between Indian and Thailand.
2. That on the facts and circumstances of the case & in law, the learned Commissioner of Income Tax (Appeals) grossly erred in holding that the appellant has transferred only the use of design while the intellectual property rights in the said designs remained with the appellant. 2.2 That on the facts and circumstances of the case & in law, the learned Commissioner of Income Tax (Appeals) failed to appreciate that the receipts of the appellant from supply of designs and drawings in view of the clauses of agreement dated May 10, 2004, can only be qualified as business income and not royalty. 2.3 That on the facts and circumstances of the case & in law, the learned Commissioner of Income Tax (Appeals) failed to appreciate that the Hon’ble ITAT, New Delhi while interpreting the clauses of the agreement dated May 10, 2004 (supra) in the case of the payer, came to the conclusion that it is a case of outright sale of designs and drawings and not royalty as per the provisions of the Act as well as Tax Treaty. The assessee craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing.”
2. The brief facts of the case are that the assessee is a company established under the laws of Thailand and is engaged in the business of providing architectural and engineering services relating to infrastructure projects throughout the Asia Pacific region. M/s Parsons Brinckerhoff India Private Ltd (PBIPL), an Indian company entered into an agreement with M/s Larsen and Toubro for providing engineering consultancy services in connection with the second Vivekananda Bridge Tollway( SVBT) between Kolkata and Howrah. In connection with the aforesaid agreement, on May, 2004, the PBIPL entered into a contract with the assessee. The assessee received payment of Rs.5,60,01,600/- from the PBIPL. The assessee company and the PBIPL are Associated Enterprise (AE) in terms of transfer pricing provision of the Income-tax Act, 1961 (in Act). The assessee filed return of income for the assessment year under consideration on February 02, 2006 at Nil income. However, a tax refund of Rs.84,00,240/- was claimed in the tax return as regards tax withheld by the PBIPL on payments made to the assessee. The learned Assessing Officer completed the assessment under section 143(3) of the Act vide his order dated December 28, 2007 by accepting the returned income. Subsequently, the Director of Income Tax, New Delhi, passed an order under section 263 of the Act on March 26, 2010 wherein it was held that assessment order passed by the learned Assessing Officer was erroneous as well as prejudicial to the interest of Revenue. The order of the Assessing Officer was cancelled with the directions to the Assessing Officer to make a fresh assessment. The said order under section 263 of the Act has been upheld by ITAT Delhi vide its order dated 20.09.2011. In compliance with the directions of learned DIT, the Assessing Officer issued a fresh notice under section 143(2) of the Act on March 31, 2010 to the assessee. The Assessing Officer referred the case to Transfer Pricing Officer (TPO) for examining the international transaction between the assessee and its Associated Enterprise (‘AE’) in India. The learned TPO vide her order dated October 29, 2011 has not made any adjustments in international transactions. During the course of revised assessment proceeding, the assessee was asked to show cause as to why payment received from PBIPL should not be taxed as “Fee for Technical Services” (‘FTS’) under Section 9(1)(vii) of the Act read with Article 22 of the DTAA or alternatively taxable as “Royalty” under Article 12 of the DTAA read with Section 9(1)(vi) of the Act. In response, the assessee filed detailed submissions stating that the payments received from PBIPL should be treated as business income of the assessee by applying Article 7 of the relevant DTAA . Further, it was also submitted that the receipts from PBIPL, being India, in the absence of assessee’s PE in India under Article 5 of the DTAA. The learned Assessing Officer rejected the contentions of the assessee and passed assessment order under section 144C/143(3) of the Act by treating the income as ‘royalty’ and assessed income at Rs.5,60,10,600/- . Aggrieved, the assessee filed an appeal before the learned Commissioner of Income Tax (Appeals) and submitted that income of the assessee from sale of designs and drawings cannot be taxed under the provisions of the Act and DTAA. The assessee relied on the decision of the ITAT in the case of PBIPL, wherein the Tribunal held that the PBIPL was not liable for deduction of tax at source under section 195 of the Act as the said payments was not taxable in India as the transaction was of outright sale of designs and drawings and there would not be any liability to withhold taxes in India. The Tribunal observed that though the agreement between the assessee and the PBIPL was titled as a service agreement but actually it was an agreement for supply of package of designs and drawings. The learned Commissioner of Income Tax (Appeals) was of the view that relevant facts had not been properly put up in correct perspective before the Tribunal during the course of hearing in the case of PBIPL. During appellate proceedings before him, he called for Memorandum of Association and article of Association of the assessee company and after examination observed that the assessee company was not engaged in sale/purchase of the designs are drawings. According to him, the assessee was only a service provider like legal advisers or doctors, who provide advice on written paper. The learned Commissioner of Income-tax (Appeals) was of the view that agreement between the assessee and the PBIPL was a purely service agreement and is no question of sale of designs by the assessee to the PBIPL arises. The learned Commissioner of Income-tax (Appeals) further observed that in the present case, (i) designs prepared by the assessee, which is created out of intellectual knowledge of the assessee and than the design is drawn on a piece of paper and given to PBIPL under terms of service contract between them . (ii) the intellectual property right (IPR) in the said design remained with assessee and the PBIPL was only using this design for the purpose of business activity. (iii) to provide the technical consultancy, the assessee had to make surveys proposed site of construction, prepare various drawings and ultimately prepare a design, which were to be handed over to the PBIPL 2.1 In view of the observations, the Ld. Commissioner of Income Tax (Appeals) held that the payments under consideration are in the nature of royalty under provisions of Act. Further, he held that provisions of Article 12 (3) of the DTAA and Explanation-2 of section 9 (1)(vi) of the Act are similarly worded and, therefore, the payment under consideration or in the nature of royalty under the DTAA also and taxable in India on gross basis. The Ld. Commissioner of Income Tax (Appeals) also held that income of the assessee was not taxable as fee for technical services (FTS) and the assessee had not service permanent establishment (PE) in India. 2.2 Aggrieved with the holding of payment as royalty by the Ld. Commissioner of Income-tax (Appeals), the assessee is in appeal before the ITAT.
The learned counsel for the assessee submitted that the agreement is only for the outright sale and supply of design and it can never be a case of royalty. The receipts of the appellant from supply of designs and drawings in view of the clauses of agreement dated May 10, 2004, can only be qualified as business income and not royalty. He further submitted that the instant case is covered from the decision of Delhi ITAT in the case of Parsons Brinckerhoff India Pvt. Ltd. Vs. ADIT (ITA No. 2728/Del/2006, reported in 118 TTJ 2014).
On the other hand, learned Sr. Departmental Representative relied on the order of learned Commissioner of Income Tax (Appeals).
We have heard the rival submissions and perused the materials available on record, especially the order of Delhi ITAT in the case of Parsons Brinckerhoff India Pvt. Ltd. (supra), a company, which has made the payment in question to the assessee. We find that the present case is covered from the decision of Delhi ITAT (supra) wherein the issue in dispute has been decided in favour of the PBIPL. The relevant paras of the decision where the transaction has been held as outright sale of design & drawing by the assesse i.e. PBAT to M/s. PBIPL are reproduced as under: “13. We will first examine the agreement dated 10th May 2004 entered into between the parties to find out the nature of the payment. The agreement is titled “service agreement” but it is well- settled that the title cannot be conclusive and we have to examine the various clauses of the agreement to find out if it is a service agreement in the real sense or an agreement for supply of drawings and designs to the assessee to be used by the latter in the Second Vivkananda Bridge Tollway Project (SVBT). In the preamble, PBAT is referred to also as the ‘supplier’, having the necessary expertise and capability to provide a part of the detailed design required to be prepared by the assessee for the SVBT project. The assessee has been described as a company engaged in the business of rendering engineering consultancy services and the scope of work which it has undertaken (in connection with the SVBT project) included preparation of designs and drawings. Annexure 1 is titled “Detailed scope of services” but again the title is not decisive and we have to examine the nature of the obligations to be performed by PBAT. According to Part 1 of Annexure 1, PBAT has to supply detailed design services for the approach viaduct super-structure of the SVBT project and the design package shall include preparation and submission of fully dimensioned general arrangement drawings, segment casting data, segment reinforcement drawings, post tensioning drawings etc. The package shall also include design data and detailed elastomeric bearings supporting the horizontal and vertical approach viaduct and seismic buffers. The package shall also include calculations, drawings and reports in accordance with Appendix A of the main agreement between L&T and CES-PBIPL consortium. The package shall further include details regarding construction stage support to clarify the design, rectification of designing errors and omissions. Part 2 of the Annexure 1 provides for design review of pile foundation, pile-caps, columns and column heads for the approach viaduct super-structure and for review of thirteen elements designed by CES, which are listed in the annexure. Part 3 of the Annexure provides for detailed design and production of final design drawings for pier P-l and P-10 of the main bridge (excluding foundation) and submission of milestone dates for good for construction as committed by the assessee to L&T. This package shall be submitted to the assessee for checking forty days prior to GFC submission dates.
From a perusal of the agreement it seems to us that though it is titled as a service agreement, it is actually an agreement for supply of a package of designs and drawings to enable the assessee to effectively render engineering consultancy services to the consortium which is in charge of constructing the Second Vivekananda Bridge Tollway (SVBT). The agreement no doubt provides for site visits by the personnel of PBAT to Calcutta and Delhi but it seems to us that these visits are only to effectively explain, in case it is found necessary, the drawings and designs to the assessee. The Annexure 1 at more than one place uses the word “package”. The package contains several engineering designs, drawings, calculations, reports and data regarding the construction of the SVBT. Clause 2 of the service agreement which is titled "General” clarifies that the supplier i.e. PBAT will carry out the scope of work from its Thailand office. It is significant to note that in this clause, PBAT is referred to as the ‘supplier’, which is consistent with the sale of drawings and designs. It is also significant to note that the entire drawings and designs were to be prepared by PBAT in its Thailand office and it is only to execute the work that its personnel may be required to made short visits to the site in India. The drawings and designs are in the form of tangible movable property, such as, documents, data-sheets, or may be in the form of a bound- book. Whatever form it takes, the agreement is one for outright sale of the property, namely, the drawings and designs the consideration for which can only be treated as business profits. The provision in the agreement for visits of the personnel of PBAT to Calcutta and Delhi, if required, is not inconsistent with the outright sale theory. Even where machinery is supplied, it is quite common to find the supplier sending his persons to supervise the installation of the machinery so that it can function effectively and properly. In the present case, the drawings and designs w'ere sold to the assessee and the intention of the parties, when they provided for visits of the personnel of the Thailand company to India, seems to be only to ensure that the drawings and designs are properly understood and put to use by the assessee in connection with the SVBT.
Further in para 19 of the order, the Tribunal has decided that sale of drawings & designs cannot be assessed as royalty in the hands of the payee i.e. the present assessee. The extract of the relevant paras is reproduced as under:
Since the outright sale of drawings and designs by the Thailand company (PBAT) does not give rise to income by way of royalty, PBAT is not chargeable to tax in India under section 9(1)(vi) of the Income-tax Act. As already noticed, if there is no liability fastened on the non-resident by the terms of the domestic law i.e. the Income-tax Act, 1961, then it is not legally necessary or permissible to examine the terms of the double tax treaty with Thailand to find out whether PBAT is liable to pya tax in India. The argument of the learned CIT(DR) was that the treaty in Article 12(3) uses the word “alienation” and also refers to “design or model” and since the substance of both clause (i) of Explanation 2 below section 9(1)(vi) and the aforesaid Article of the treaty is the same, even the proceeds received by PBAT for alienation of the drawings and designs are taxable in India as royalty. In our view, if in substance both the provisions of the Act and the treaty are similar and must be construed similarly, then it follows, having regard to our view regarding Explanation 2(i) below sec. 9(1)(vi), that the words “design or model” in the treaty must be construed on the basis of noscitur a sociis. We find that the other words used in Article 12(3) of the treaty are spcieis of intellectual property, such as, copyright of literary, artistic or scientific work, patent, trademark, plan, secret formula or process etc. The design or model referred to in the article must therefore take colour from the surrounding words which denote intellectual property rights and, therefore, the proceeds of an outright sale of drawings and designs cannot be considered as royalty within the meaning of the said article. We are referring to the argument of the learned C1T DR on merits oniy in deference to the point sought to be made by him and we may clarify that it is really not necessary for us to examine the question whether PBAT can be brought to tax under-Article 3 2.3 of the treaty, having held that it cannot be assessed in India under the Income-tax Act, 1961, in respect of the amounts received by it from the assessee for outright sale of the drawings and designs. At the cost of repetition, we may add that a double tax treaty cannot be construed as a taxing enactment. 7. The Tribunal also in para 21 of the order, held the PBAT i.e. the present assessee was not having any PE in India. The relevant para of the order is extracted as under:
With regard to the applicability of Article 7, the learned CIT DR a point in the course of his arguments that the assessee cannot raise the plea that PBAT has no PE in India. It was his submissions that the assessee may not be aware of the facts and it is quite possible that PBAT may have a PE in India without the knowledge of the assessee. We are however of the opinion that it is open to the assessee to raise the plea since it is incidental to its contention that PBAT is not chargeable to tax in India in respect of the amount remitted to it by the assessee. We are unable to find any justification for preventing the assessee from contending that the recipient of the income has no PE in India, even while contending that Article 7 of the treaty cannot apply because of the absence of the PE. We further find that such a contention has been taken by the assessee in the very first instance before the Assessing Officer and he has not questioned or disputed the same. Even the CIT (Appeals) does not appear to have disputed the assessee’s statement that PBAT has no PE in India. In these circumstances, we are unable to accept the argument of the learned CIT DR 8. The Tribunal finally held that the amount remitted was not royalty within the meaning of the Act as well as Treaty. The relevant para is extracted as under:
For the foregoing reasons, we are of the view that the departmental authorities went wrong in their conclusion that the PBAT in Thailand was ‘royally’ within the meaning of section 9(3)(vi) of the Income-tax Act and Article 12(3) of the Double Tax Treaty with Thailand. We set aside their orders and allow the appeal of the assessee with no order as to costs.” 9. On perusal of the decision (supra), we find that the transaction in question is an outright sale of design and drawings and does not constitute royalty in the hands of the assessee. The learned Commissioner of Income-tax (Appeals) observed on the basis of Memorandum of Association/Article of Association of the assessee company, it was not engaged in sale of the designs or the drawings. However, in the decision the Tribunal after examination of the agreement between the parties held that though it was titled as a service agreement but actually it was an agreement for supply of the package of designs and drawings. The Tribunal has further observed that rather than form, substance is important and said that provision in the agreement for visit of the personal of the assessee to Kolkata and Delhi, if required, is not inconsistent with the outright sale theory. Further, the contention of the Ld. Commissioner of Income-tax (Appeals) that the intellectual property right of the design remained with assessee has been disputed by the Ld. counsel of the assessee. It is submitted by the learned counsel that the assessee was bound to surrender design to PBIPL as per clause 13 of the agreement between the parties . 10. We are of the opinion that payment received by the assessee from PBIPL has been examined in detail by the Tribunal and the payment being in nature of business income, it was not taxable in India in the absence of PE in India. Consequently, the amount remitted to the assessee by PBIPL was not ‘royalty’ within the meaning of section 9(1)(vi) of the Act and Article 12(3) of the Double Tax Treaty with Thailand.
Thus, respectfully following the decision of Delhi ITAT in the case of Parsons Brinckerhoff India Pvt. Ltd. (supra), we set aside the order of learned Commissioner of Income Tax (Appeals) and ground no. 2 of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed.
The decision is pronounced in the open court on 28th February, 2017.