M/S. HINDUSTAN PETROLEUM CORPORATION LTD. vs. THE ADIT (IT) 3(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the orders dated 17.09.2007, of CIT(A)-XXXIII, Mumbai, the assessee has filed the above mentioned appeals,originating from the orders,of the AO.s,passed u/s.195(2)of the Act. facts: 2.The assessee had entered into license and engineering agreement dated 13.12.04 with M/s. UOP,USA(UOP)for CCR platforming processing unit at Vishakpatanam.As per the agree- ment following sums were payable towards various services and purchase of Basic Engineer - ing Design Specification (BEDS): i.Royalty US $9,91,032 ii)Basic Engineering Design –US $10,70,000 iii).Training US $ 31,100. Out of the above payments,the payments under the head royalty and training were offered for tax under the head Fee for Technical Services (FTS).The balance amount i.e.US$ 10,70,000 was towards providing basic engineering design,as stated earlier.In order to remit the said amount,the assessee requested the assessing Officer(AO) to issue of no objection certificate at Nil rate of TDS.Before him,the assessee argued that the job carried out by UOP was in the nature of procurement of capital asset,that it was not in the nature of FTS.However, the AO did not accept the assessee’s contention.He held that the design was made as per the specification of the assessee,that it was not a ready-made design but prepared as per the requirements of the assessee, that UOP was also involved at various stages to hold meeting with the employees of the assessee to review the design and process flow diagrams and piping instrument diagrams, that UOP was required to prepare and provide operating manual giving general information to the assessee, that the non-resident company was responsible to suggest changes in basic designs, that it was not simply a purchase transaction that UOP was responsible to train the personnel of the assessee. Finally, the AO held that UOP was not only supplying BEDS but was also making available the necessary support to use and maintain the same in future by the employees of the assessee, that the amount payable by the assessee was taxable in the hands of UOP as Fee for Included Services (FIS).Vide his order,dt.17.3.05, passed u/s.195(2) of the Act,he held that assessee should deduct tax at the rate of 17.25% for the payment to be made to US entity amounting to USD 10,70,000.The AO also levied education cess@2% over and above the entire remittance.

7678-81/M/07-HPCL 3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority (FAA).It was argued that payment made towards BEDS package for the refinery at Visakhapatnam was towards purchase of capital asset, that it was not for FIS,as contemplated under Article -12 of DTAA,that in absence of PE of UOP in India the disputed payment did not constitute business income/profits taxable in India as per the DTAA.The assessee referred to certain case laws and contended that purchase of technology was purchase of capital asset and plant.It referred to the order of the CIT(A)-XXXIII dt.25.10.02, wherein similar payment made by the assessee to Kinetic Technology International PV Holland was not considered as FIS,that in that case the FAA had held that payment was for sale of BEDS and that same was not taxable as royalty/FTS. With regard to education cess, the assessee referred to section 2(37A)(iii) wherein the rate or rates enforced had been defined for the purposes of TDS u/s. 195.The assessee referred to Cir.No.333of CBDT dt.24. 4.1982 as well as Circular No.728 dt.30.10.95 wherein it was directed that education cess would not be applicable where the provisions of DTAA were applicable. After considering the submissions of the assessee and the order passed by AO u/s. 195(2),the FAA held that the assessee had entered into foreign technical collaboration with UOP for getting technology, that it had entered into two agreements on the same day(i.e. on 13.12. 2004),that one was for getting license processed and the other was for getting technical information with regard to BEDS, that both the agreements were part of composite agreement for getting the technical collaboration, that from the license agreement for CCR platforming process unit the assessee had got a non-exclusive and non transferable license to use the process in the unit, that it had right to expose, sell or use the products of the process produced in the unit.He referred to Article 3, 5.1 and 5.2 of the Agreement and held that basic design and engineering activity was a part of technological information, that services done on BEDS was only as a part of the license granted by UOP for licensed process, that technical services would come under Article 12 (4)(a) of the India US Tax Treaty, that without the basic design and engineering the assessee could not use the process obtained from UOP, that the services provided for BEDS was an ancillary and subsidiary to the application or enjoyment of right obtained from UOP,that the amount paid would be covered by the definition of FIS as contemplated under Article-12(4)(a) of the Treaty, that engineering agreement for BEDS was nothing but granting of license to the assessee to use technical information of UOP, that the payment would come under the purview of Article-12(3)(a) of the tax treaty, that same was to be assessed as royalty.Finally, he held that the payment had to be taxed as Royalty/FIS.

4.Before us,the Authorised Representative (AR) stated that agreements for basic design and royalty were separate agreements,that the non-resident company had to provide technical information,that the remaining agreement was not part of the basic design agreement, that assessee had deducted tax at source for the training to be imparted by the foreign entity, that the assessee was supplied general operating manual, that it was outright purchase of a capital asset,that nothing was made available to the assessee, that the assessee had made payments under different heads,that sale had taken place outside India, that consideration was paid outside India, that the payment made by it was not for FIS,that the FAA,in his order dated 25/10/2002,passed in case of remittance made to another land company,in which on similar facts had held that the amount in question was not taxable as royalty or fees for technical services under article 12 of the DTAA.She referred to Articles 3, 3.1 and 5 of the agreement along with pages 35,43,48,113-153 of the paper book.She relied upon the cases of Indian oil Corporation Ltd.(33SOT243),Modern Thread(I).Ltd.(69ITD115),Scientific Engineering 2

7678-81/M/07-HPCL House(P.)Ltd.(329ITR442),Finoarm Sheets Ltd.(152ITD 77).The Departmental Representative (DR)contended that the agreement was tailor-made agreement,that it was not outright purchase of technical knowledge, that even if it was outright purchase the payment fell within the meaning of royalty, that non-resident entity had supplied commercial information, that the information was covered by provisions of article 12 (3) (a) of the tax treaty, that article 12 (4) (b) dealt with development and transfer of technology, that the tax treaty did not define transfer, that the provisions of section 2(47) defined the word transfer, that the transaction entered into by the assessee was hit by Article 12(4)(b), that engineering and license agreement were part of the same transaction,that they represented unified and composite agreement, that assessee was governed by Article12 and not by Article 13 of the DTAA. 5.We have heard the rival submissions and perused the material before us.We find that the assessee had entered into an agreement,dated 13.12.04 with UOP for CCR-platforming at its Vishakpatanam Unit,that as per the agreement certain sums were payable towards various services and purchase of BEDS,that the assessee claimed that it had purchased the package on outright basis and thus the package was a capital assets, that the payment was made outside India,that same was taxable either as capital gains or a business income,that the assessee was not having any PE in India,that the business income was not taxable,that the capital gain was not taxable in India as per DTAA,that the AO and the FAA were of the opinion that payment made for BEDS was covered by the definition of Royalty or FTS and that same was taxable. 5.1.Before proceeding further,we would like to refer to some of the cases that deal with the similar issue.First of them is the case of Indian oil Corporation Ltd.(supra).Facts of that case were that the assessee had decided to install a bitumen production unit in India,that an Austrian company had a right to grant license in favour of third-party,that the assessee entered into an agreement with the Austrian company for setting up a plant for manufacture of bitumen,that the agreement consisted among other things of BEDP and it consisted of supply of design for installation and operation of the reactor section including process layout for the reactor,that in respect of the BEDP the non-resident company raised three invoices,that the assessee made an application to the AO under section 195 (2) to make payment without deduction of tax at source,that it was argued that services rendered by the Austrian company for preparation of basing engineering with related know-how package was in the nature of technical service, that the entire service for preparation of basing engineering was not liable to tax in India,that the assessee contended that the services rendered by the Austrian company for preparation of basic engineering and the related know-how package was in the nature of technical service, that it was also argued that the entire services for preparation of basic engineering and relented know-how was performed outside India,that as per Article 7 of the tax treaty the payment for such services was not liable to tax in India,that the AO held that the Austrian company, under the agreement, allowed the assessee to use the process in India therefore the payment in question was for use of process in India and that same was royalty liable to be taxed,that the FAA upheld the order of the AO. Deciding the appeal,the Tribunal held that agreement between the assessee and the Austrian company gave details of the BEDP,that the terms revealed that it consisted of various drawings,designs,that based on those documents the assessee was to set up its plants by using those lines through its own workforce, that the Austrian company was only to supervise installation and was to commission the start-up plant, that the taxability of consideration relating to those services was not in dispute,that the BEDP package was nothing but a know- 3

7678-81/M/07-HPCL how supplied along with a license to use the know-how by the assessee without any limitation for its own use, that the assessee did not have any other right, that in order that a payment qualified as a royalty under the Indo Austria treaty it had to be in nature of royalty or like royalty,that royalty was paid towards right to use copyrights, artistic or scientific works,cinematographic films, patents,models,designs,plans,secret process or formulae, trade - marks and other like property rights,that the impugned payment was towards the supply of basic and engineering packages and was not towards the use of some property,that it was for creating an asset in the shape of plant that would be designed constructed and operated as per the technical know-how supplied by the Austrian company, that in the instant case the amount paid by the assessee was for creating an asset in the shape of a plant that the consideration was for passing of information concerning the design of plant which was tailor- made to meet the requirement of a buyer, that the Austrian company had granted the right to use the manufacturing process which was embedded in the plant to be set up based on the BEDP and not the right to use the license,that the consideration was not based on the amount of use,that the impugned payment could not be held in the nature of royalty, it was a technical fee for business profit, that it was not chargeable to tax in India unless the fee was paid for services rendered in India or if the Austrian company had PE in India, that it was not the case of the revenue authorities that the services were rendered in India or the Austrian company had a PE in India, that the payment by the assessee to the non-resident company was not in the nature of royalty and therefore same was not chargeable to tax in the hands of Austrian company under the Act, that there was no obligation on the part of the assessee to deduct tax at source. Next case is of Modern Threads(I) Ltd.(supra).In that matter the assessee-company/sub licensee had entered into a contract with an Italian company/ sublicensee for collaboration for setting up a plant in India as per the technical know-how and basic process engineering documentation provided by the Italian company for the manufacturing of purified telepathic acid (PTA).The contract provided for grant of right and sublicense to the assessee to use and practice the process in India and to supply know-how and documentation for design construction and operation of the plant as per the terms set out in the contract, that the contract agreement was accordingly approved by the government of India.The other relevant facts were that in consideration of the right and sublicense granted as well as for supply of basic process engineering the assessee paid the Italian company specified sums in US dollar in instalments net of any Indian taxes,that it made an application u/s.195(2) for grant of no objection to the payment of the first instalment, that the AO considered various articles of the contract agreement and held that amount payable was royalty, that the FAA upheld the finding of the AO. There was difference of opinion between the members of the Tribunal, so, it was referred to the third member.Finally, the Tribunal held as that the payment to be made in instalments to the sublicensee for supply of technical know-how and also for supply of basic process engineering documentation for designing construction and operation of the plant related not to the use of any process secret formula or patents for production of any commodity but for creating an asset in the shape of a plant design,constructed and operated as per the technical know-how developed by the licensor and basic process engineering documentation provided by the sublicensee and this plant for production of PTA,that such payment, thus,made to the sublicensee as per the contract agreement did not fall within the term royalty,that the payment made for supply of technical know-how was also subject to the liability of the sublicense on account of rectifying fall, if any, in designing construction and operation of the plant and on account of litigation imposed by the third-party for use of their patents rights etc.,that the as the sublicense had supplied by way of sale to the assessee,that 4

7678-81/M/07-HPCL technical know-how as well as basic process engineering documentation for setting up of the plant the consideration received would undoubtedly be a business profit in the hands of the sublicensee and the sublicensee having no permanent establishment India such business profit were liable to be assessed in the hands of the sublicensee in Italy and not in India as royalty, that technical assistance to be provided showed that same were not of the same character and the same had to be treated as such distinctly,that the payment for supply of technical know- how and basic process engineering documentation was separate and the same was not a royalty similar to that provided in clause(3) of Article 13,that the payment, thus, made was nothing but the business profit of the sublicense for supply of technical know-how and documentation,that the amount payable to the Italian company for supply of technical know- how and basic process engineering documentation for setting off the plant in India for manufacturing of PTA was the business profit in the hands of Italian company,that the revenue authorities were, therefore,not justified in tax on the said payment in India treating the same is royalty. In the case of Finoram Sheets Ltd.,Pune Tribunal had held that sum paid for obtaining permanent right to use designing services would not fall within the purview of royalty. In that case the assessee had entered into a technology license agreement with a foreign company. The agreement was for providing design imaging services and the technical know-how for election of plant, providing of commercial services and providing of technical and processed know-how to enable the assessee to manufacture the product to the said company. The AO was of the opinion that said amount were in nature of fees for technical services and therefore subject to tax in India.He referred to the section 9 (1)(vii)of the Act.The FAA held that services towards designing were not only nature of FTS but also fell within the definition of word royalty as provided in the Act.Reversing his decision,the Tribunal held that as per clause 2(a) of the agreement the assessee was granted a permanent right to use and exploit the designing, that to that extent agreement in question and research payment for obtaining plant know-how i.e. designing,characterisation of plant and machinery could not be considered as payments falling within the purview of royalty,that the technical and processed know-how services provided under the agreement were clearly covered by definition of royalty under the Act. 5.2.An analysis of the above three cases clearly lead to the conclusion that if an assessee makes payment for basic engineering program or basic design to a non-resident entity and the supplier does not have a PE in India,such payments would not be taxed in India.If the assessee purchases BEDP out rightly it would amount to purchase of capital asset.But,if the payment is made for use of property rights the payments has to be taxed as Royalty.There is conceptually difference in payment made for use of certain rights for a certain period and payment made for acquiring basic designing.In the case under consideration,it is clear that the assessee had treated other two payments as Royalty and had deducted tax at source,that the American-company had provided the assessee basic engineering design to set up a plant,that designing work was not carried out in India and the payment was also made outside India. Therefore,in our opinion,the assessee was not liable for deducting tax at source for the said payment.The agreements cannot be treated a part of a composite agreement-one agreement is for supply of basic designing to set up a plant and others are for use of property-rights. Reversing the order of the FAA,we hold that payment in question was neither royalty nor FTS.Effective ground of appeal is decided in favour of the assessee. ITA/7679/Mum/2007:

7678-81/M/07-HPCL 6.In this appeal,we find that the assessee had entered into an agreement,dtd.29/06/2004,with Belco Technologies Corporation Ltd.,USA,that Belco had developed BDEP specifically for the use of HPCL for EDV wet scrubbing system.The total fee payable to Belco was US$ 2,71,246.The assessee contended before AO that the job carried out by Belco was providing basic engineering design and that it had acquired capital asset from the American-company. However,the AO was of the opinion that the agreement entered by the assessee was not only for supply of engineering design,that the Basic Design and Engineering Package(BDEP) also included providing other services of consultancy training and skilled personnel, that the transaction could not be termed of mere sale of capital asset,that the payment in question was FTS.The FAA,in the appellate proceedings,upheld the order of the AO. 6.1.Before us,the representatives of the sides advanced the same arguments that were advanced while arguing the earlier appeal.We find that the assessee had also entered into separate agreement on 29.6.2004 with Belco for grant of license having non-exclusive non- transferable right to use the technology and basic design,that the said agreement included the use of exclusive rights for which a licence fee of USD 3,17,877 and same was paid separately.As the assessee had made separate payment for use of property rights,so,the expenditure incurred for acquiring the capital asset would not liable to taxation.Following our earlier order i.e.,ITA No.7678/Mum/ 2007,we decide the effective ground of appeal in favour of the assessee. 7.Facts of the case were that the assessee had entered into an agreement,dt.9.12.2004,with Technip KTI SPA,Italy for development of Basic Design and Engineering Package within (BDEP),that it had paid US$ 1,58,000 towards licence fee and US$ 24,54,116 towards consulting assistance besides paying USD 3,44,000 towards BDEP, that it contended before the AO that payment made for BDEP was not liable for deducting tax at source,that it had deducted tax at source under the head licence fee and consulting assistance, that the AO was of the opinion that BDEP-payment would fall under the head royalty/FTS.The FAA upheld the order of the AO. We have already held that payment made by the assessee for BDEP cannot be taxed as royalty/FTS.Effective ground raised by the assessee,is decided in its favour. ITA7681 No./Mum/2007 8.This appeal is about other payment made to Belco.While deciding the ITA/7679/ Mum/ 2007,we have already held that the order of the FAA cannot be endorsed.Following the same, we decide the effective ground of appeal in favour of the assessee.

As a result, all the appeals filed by the assessee stand allowed. फलतः िनधा�रती �ारा दािखल क� ग� सभी अपील� मंजूर क� जाती ह�. Order pronounced in the open court on 30th March, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांक 30 माच�, 2016 को क� गई । Sd/- Sd/- (राम लाल नेगी /Ram Lal Negi) (राजे�� / RAJENDRA) �याियक सद�य / JUDICIAL MEMBER लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य मुंबई/Mumbai,�दनांक/Date: 30.03. 2016 व.िन.स.Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 6

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