Outotec (Finland) OY, Kolkata V. DCIT (International Taxation), Circle - 2(1) , Kolkata

ITA 2601/KOL/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4823 (ITAT-KOLKATA)
• Duration Of Justice: 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 14-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Double taxation relief; Permanent establishment; Advance ruling
• Section: 143(3); 250; 113; 13

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, KOLKATA BEFORE SRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER & SRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER I.T.A. NO.2601/KOL/2018 (ASSESSMENT YEAR: 2015-16) OUTOTEC (FINLAND) OY, KOLKATA....................... APPELLANT [PAN :AABCO9366P] VS. DCIT(INTERNATIONAL TAXATION), CIRCLE-2(1), KOLKATA .....................................................................................RESPONDENT APPEARANCES BY: SHRI K. M. GUPTA, ADVOCATE & PIYUSH GUPTA, CA, APPEARING ON BEHALF OF THE APPELLANT. DR. P. K. SRIHARI, CIT(DR), APPEARING ON BEHALF OF THE RESPONDENT. DATE OF CONCLUDING THE HEARING : MAY 7 TH , 2019 DATE OF PRONOUNCING THE ORDER : MAY 31 ST ,2019 O R D E R PER J. SUDHAKAR REDDY :- THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE LD. ASSESSING OFFICER PASSED U/S 143(3) R.W.S 144C(13) OF THE INCOME TAX ACT, 1961 (THE ACT), DATED 31.10.2018 FOR ASSESSMENT YEAR 2015-16. 2. THE BRIEF FACTS ARE BROUGHT OUT IN PARA 1 OF THE FINAL ASSESSMENT ORDER WHICH IS EXTRACTED FOR READY REFERENCE: OUTOTEC(FINLAND) OY(ASSESSEE) IS INCORPORATED IN FINLAND AND IS A TAX RESIDENT OF THE SAME. THE ASSESSEE IS WORLDWIDE LEADER IN PROVIDING INNOVATIVE AND ENVIRONMENTALLY SOUND SOLUTIONS FOR A WIDE RANGE OF CUSTOMERS IN METALS PROCESSING INDUSTRIES. DURING THE FINANCIAL YEAR 2014- 15, WITH REGARD TO INDIAN PROJECTS, THE ASSESSEE HAS PRIMARILY EARNED REVENUE FROM (I) SALE OF DESIGNS AND DRAWINGS; (II) RENDITION OF TECHNICAL SERVICES; (III) LICENSE FEES; AND (IV) TESTING AND OTHER SERVICES. 3. THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 26.11.2015 DECLARING TOTAL INCOME OF RS.1,89,38,136/-. IT OFFERED TO TAX INCOME FROM RENDITION OF TECHNICAL SERVICES OF RS.1,82,71,454/- AND INCOME FROM ROYALTY(LICENCE FEES) OF RS.6,66,682/-. IT DID NOT OFFER TO TAX INCOME RECEIVED FROM THE SALE OF DESIGNS AND DRAWINGS OF RS.2,80,87,244/- AND INCOME FROM RENDERING TESTING AND OTHER SERVICES OF RS.3,36,21,283/-. THE ASSESSEES CASE IS THAT, INCOME FROM SALE OF DESIGNS AND DRAWINGS IS A SALE OF 2 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA COPYRIGHTED ARTICLE AND THE INCOME DERIVED THEREFROM IS BUSINESS INCOME AND AS THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA, AND HENCE THE BUSINESS PROFITS ARE NOT TAXABLE IN INDIA. ON THE ISSUE OF INCOME FROM 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 THAT THE INTELLECTUAL PROPERTY OF THE DESIGN AND DRAWINGS REMAINS WITH THE APPELLANT AND THE INDIAN CUSTOMER IS ONLY GRANTED A LICENSE TO USE SUCH DESIGN AND DRAWINGS. ON THE BASIS OF THIS CLAUSE, LD. AO STATED THAT THE SUPPLY OF DESIGN AND DRAWINGS DOES NOT PERTAIN TO ANY SALE OF GOODS BUT TAKES THE CHARACTERISTICS OF GRANTING OF A LICENSE, ALLOWING THE INDIAN CUSTOMER TO USE IT AND HENCE IS IN THE NATURE OF ROYALTY AS PER THE PROVISION OF THE ACT AS WELL AS DTAA. 4. THE DESIGN AND DRAWINGS SUPPLIED BY THE APPELLANT ARE PROTECTED BY INTELLECTUAL PROPERTY RIGHTS AND AT THE SAME TIME ENCOMPASS A SERIES OF TECHNICAL SERVICES PERFORMED AT EVERY STAGE LIKE INDIGENOUS MANUFACTURE OF EQUIPMENT, ERECTION, START-UP, COMMISSIONING AND DEMONSTRATION OF PERFORMANCE TEST. ACCORDINGLY, THE RECEIPTS/PAYMENTS ON ACCOUNT OF SUPPLY OF DESIGNS AND DRAWINGS MAY HAVE DUAL AND OVERLAPPING CHARACTER A PORTION BEING IN THE NATURE OF ROYALTY AND THE OTHER PORTION BEING IN THE NATURE OF FEES FOR TECHNICAL SERVICES. 5. DESIGN AND DRAWINGS SUPPLIED WERE TAILOR MADE AS PER THE REQUIREMENTS OF THE CUSTOMER AND WERE LINKED WITH THE ERECTION, COMMISSIONING, TESTING, OPERATION, ETC. OF THE PLANT IN INDIA. THEY WERE NOT READYMADE/OFF-THE SHELF, AS THESE DESIGNS AND DRAWINGS WERE FINALIZED AFTER OBTAINING APPROVAL FROM THE PURCHASER AND TECHNOLOGY WAS ALSO MODIFIED IN MAKING THESE DESIGNS AND DRAWINGS IN ORDER TO ENSURE THAT THEY MET THE PARAMETERS SPECIFIED IN THE CONTRACTS. ACCORDINGLY, THE SAID DESIGNS AND DRAWINGS INVOLVED TECHNOLOGY, SKILL AND SCIENTIFIC EXPERIENCE, THEREFORE THE CONTRACT WITH THE CUSTOMER CONSTITUTED A CONTRACT FOR SERVICES OF HIGHLY SKILLED AND TECHNICAL NATURE AND ACCORDINGLY FALL UNDER PURVIEW OF TECHNICAL SERVICE TAXABLE U/S 9(1)(VII) OF THE ACT AS WELL AS ARTICLE 12 OF THE DTAA. 3 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA 6. APPELLANTS RELIANCE ON THE DECISION OF APPELLANTS GROUP COMPANYS OUTOTEC GMBHS CASE IS NOT APPROPRIATE IN THE PRESENT CASE AS THE SAID DECISIONS WERE CHALLENGED BY REVENUE BEFORE THE HONBLE HIGH COURT OF CALCUTTA WHICH IS PENDING FOR ADJUDICATION. 7. RELIANCE WAS PLACED ON FOLLOWING DECISIONS TO SUBSTANTIATE THE CONTENTION THAT INCOME FROM SALE OF DESIGN AND DRAWINGS TANTAMOUNT TO FEES FOR TECHNICAL SERVICES:- POSCO ENGINEERING & CONSTRUCTION CO. LTD VS. ADDL. CIT [42 TAXMANN.COM 500] 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 ONLY LIMITATION IS WITH RESPECT OF TAX RATE. 2. THE APPELLANT HAS TRIED TO SELECTIVELY QUOTE PARA 5 OF THE ARTICLE 12 OF THE DTAA AND HAS TRIED TO INTERPRET IT TO ITS OWN ADVANTAGE. THE INTERPRETATION OF APPELLANT IS FALLACIOUS AND IS TO COUNTER THE RULE OF ALLOCATION LAID DOWN IN PARA 2 OF THE ARTICLE 12 OF THE DTAA. IF THE ARGUMENT OF APPELLANT IS ACCEPTED, THE SOURCE STATE MERGES WITH THE STATE OF RESIDENCE WHICH IS UNACCEPTABLE AND UNWORKABLE PROPOSITION IN CONTEXT OF ANY DTAA. 3. THE SERVICE IS TREATED TO BE PERFORMED ONLY WHEN THE BENEFICIARY IS ABLE TO USE IT FOR A PURPOSE AND THE INTENDED USES OF THE SERVICES TESTED IN THE LABORATORIES IN FINLAND ARE ULTIMATELY IN INDIA. 4. IN TERMS OF PARA 5 OF THE ARTICLE 12 OF THE DTAA, HCL/TATA HAVE PES IN INDIA AND THE PAYMENTS ARE IN RESPECT OF THE SAID PES AND ACCORDINGLY, THE RECEIPTS FROM TESTING AND OTHER SERVICES ARE TAXABLE IN INDIA. 5. RELIANCE WAS PLACED ON FOLLOWING DECISIONS TO SUBSTANTIATE THE CONTENTION THAT INCOME FROM TESTING AND OTHER SERVICES TANTAMOUNT TO FEES FOR TECHNICAL SERVICES: ASHAPURA MINICHEM LTD. VS. ADIT (2010) 40SOT 220(MUM) GUANGZHOU USHA INTERNATIONAL LTD., AAR NO.1508 OF 2013 6. AGGRIEVED WITH THE FINDINGS OF THE ASSESSING OFFICER AND THE FINDING OF THE D.R.P WHICH ARE NOW PART OF THE FINAL ASSESSMENT ORDER WHICH IS IN DISPUTE, THE ASSESSEE IS BEFORE US. 4 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA 7. THE LD. COUNSEL FOR THE ASSESSEE MR. K.M. GUPTA SUBMITTED THAT THE INCOME DERIVED FROM THE SALE OF DESIGNS AND DRAWINGS IS NOT TAXABLE, EITHER AS ROYALTY OR FEES FOR THE TECHNICAL SERVICES, AS THESE WERE SOLD OUTSIDE INDIA, TO THE INDIAN CUSTOMERS. IT WAS SUBMITTED THAT THE ASSESSEE HAS STANDARD TECHNOLOGIES AVAILABLE WITH IT, BASED ON WHICH DESIGNS AND DRAWINGS WAS PREPARED OUTSIDE THE TERRITORY OF INDIA AND THE SALE OF THE SAME WAS ALSO AFFECTED OUTSIDE THE TERRITORY OF INDIA FOR CONSIDERATION WHICH WAS ALSO RECEIVED OUTSIDE INDIA IN FOREIGN CURRENCY. HE SUBMITTED THAT SIMILAR ISSUE ON IDENTICAL SET OF FACTS HAS COME UP BEFORE DIFFERENT BENCHES OF ITAT IN THE CASE OF THE ASSESSEES GROUP CONCERNS I.E. OUTOTEC GMBH FOR THE ASSESSMENT YEAR 2010-11 AND 2011-12 AND ISSUE WAS ADJUDICATED IN HIS FAVOUR. HE POINTED OUT THAT THE BOTH THE CONTENTIONS OF THE ASSESSING OFFICER 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 ASSESSEES CASE. HE SUBMITTED THAT THE RATIO OF THE DECISION IN THE ASSESSEES 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, AN EXCEPTION HAS BEEN CURVED OUT TO TAX AND SERVICES ONLY IN THE STATE WHERE THE SERVICES, IN QUESTION, ARE PERFORMED. HE SUBMITTED THAT THIS PERFORMANCE CONDITION IS ONLY AVAILABLE IN INDIA-FINLAND DTAA. HE TOOK THIS BENCH TO THE DECISIONS OF THE BOMBAY TRIBUNAL IN THE CASE OF ASHAPURA MINICHEM LTD. VS. ADIT (2010) 40 SOT 220 (MUM) AND SUBMITTED THAT THIS DECISION IS 5 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA DISTINGUISHABLE. HE CONTENDED THAT EFFECT SHOULD BE GIVEN TO THE WORDING IN ARTICLE 12(5) OF THE INDIA-FINLAND DTAA. HE PRAYED FOR THE RELIEF. 9. THE LD. DEPARTMENTAL REPRESENTATIVE, DR. P.K. SRIHARI, ON THE OTHER HAND, OPPOSED THE CONTENTIONS OF THE ASSESSEE AND SUBMITTED THAT THE DESIGNS AND DRAWINGS IN QUESTION, ARE IMBEDDED IN THE PLANT SET UP BY THE INDIAN CUSTOMERS, AS CLAIMED BY THE ASSESSEE IN ITS WRITTEN NOTE AND HENCE IT IS NOT THE CASE OF SALE OF DESIGNS AND DRAWINGS PER SE. HE RELIED ON THE ORDER OF THE ASSESSING OFFICER AS WELL AS THE DRP AND SUBMITTED THAT THE ASSESSEE ONLY GRANTS LICENCE TO ITS CUSTOMERS FOR USE OF DESIGNS AND DRAWINGS AND THAT NO TITLE IN THE DESIGNS AND DRAWINGS IS TRANSFERRED. HE SUBMITTED THAT THE DECISIONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE, WHICH ARE OF ITS SISTER CONCERN, ARE DISTINGUISHABLE ON FACTS. HE POINTED OUT THAT THE DESIGNS AND DRAWINGS, IN QUESTION, WERE TAILORED MADE AS PER THE REQUIREMENTS OF THE CUSTOMERS AND WERE NOT A SEPARATE PRODUCT. HE SUBMITTED THAT THE INCOME, IN QUESTION, IS TAXABLE U/S 9(1)(VII) OF THE ACT AND UNDER ARTICLE 12 OF THE DTAA. HE DISTINGUISHED THE DECISIONS RELIED UPON BY THE ASSESSEE AND PRAYED THAT THE ORDER OF THE ASSESSING OFFICER ON THIS ISSUE BE UPHELD. 10. ON THE ISSUE OF TAXABILITY OF INCOME FROM RENDERING OF TESTING AND OTHER SERVICES, THE LD. D/R SUBMITTED THAT THE SOURCE RULE APPLIED AND THE AMOUNT IN QUESTION IS TAXABLE AS ROYALTY OR IN THE ALTERNATIVE AS FTS IN THE SOURCE COUNTRY I.E. INDIA, BOTH UNDER THE ACT, AS WELL AS UNDER THE TREATY. HE ARGUED THAT THE SERVICES HAVE BEEN AVAILED IN INDIA AND THOUGH THE ASSESSEE RENDERED THE SERVICES OUTSIDE THE COUNTRY, IT DOES NOT TAKE AWAY THE RIGHT OF SOURCE COUNTRY TO TAX THIS AMOUNT. HE DISTINGUISHED THE INTERPRETATION OF THE LD. COUNSEL FOR THE ASSESSEE ON THIS ISSUE AND RELIED ON THE ORDER OF THE ASSESSING OFFICER /DRP AND SUBMITTED THAT THE SAME BE UPHELD. 11. BOTH PARTIES AGREED WITH THE GROUND NOS.4 & 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. 6 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA 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 COPY OF THE INVOICES RAISED AT PAGE 58 OF THE PAPER BOOK AND THE DESCRIPTION OF THE GOODS ARE AS FOLLOWS: SUPPLY OF IMPORTED DESIGNS AND DRAWINGS FOR CIVIL & STRUCTURAL WORK, UTILITIES AND OTHER SERVICES, ERECTION, START-UP, COMMISSIONING AND DEMONSTRATION OF PERFORMANCE TESTS ETC. FOR CHROMITE TAILING RETREATMENT PLANT AT SUKINDA PLANT, TATA STEEL, SUKINDA, ODISHA. 15. SIMILARLY, COPIES OF OTHER AGREEMENT FOR SALE OF DRAWINGS AND DESIGNS HAVE ALSO BEEN PLACED ON RECORD. A PERUSAL OF THE SAME DEMONSTRATES THAT THE DESIGNS AND DRAWINGS, IN QUESTION, ARE NOT EMBEDDED IN THE PLANT AND MACHINERY. THEY ARE SEPARATE ITEMS WHICH WERE SOLD TO THE ASSESSEE. THE FACT THAT THESE WERE SOLD OUTSIDE INDIA IS NOT DISPUTED. THE SIMILAR ISSUE ON SIMILAR FACTS WAS CONSIDERED IN THE GROUP CASE OF THE ASSESSEE IN THE CASE OF OUTOTEC GMBH VS. DCIT IN ITA NO.431 & 432/KOL/2014 ASSESSMENT YEAR 2010-11 WHEREIN IT WAS HELD AS UNDER: 30. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES IF THE CASE. THE FACTS MENTIONED ABOVE, CLAUSES OF CONTRACT AND THE SAMPLE COPIES OF AIRWAY BILL CLEARLY INDICATE THAT THE ENTIRE WORK RELATING TO DESIGNS AND DRAWINGS WAS DONE OUTSIDE THE TERRITORY OF INDIA; SALE WAS AFFECTED OUTSIDE INDIA AND THE CONSIDERATION WAS ALSO RECEIVED OUTSIDE INDIA IN FOREIGN CURRENCY. IN VIEW THEREOF AND THE DETAILED LEGAL SUBMISSION MENTIONED ABOVE WITH REGARD TO INCOME FROM SALE OF EQUIPMENT, IT IS SUBMITTED THAT THE BUSINESS INCOME EARNED BY THE ASSESSEE FROM THE SALE OF DESIGNS AND DRAWINGS IS NOT LIABLE TO TAX IN INDIA BOTH UNDER THE PROVISIONS OF THE ACT AND DTAA. NOW WE HAVE TO CONSIDER THE JUDGMENTS DEALING WITH THE NON-TAXABILITY OF SALE OF DESIGNS AND DRAWINGS OUTSIDE INDIA AS CITED BY LD. COUNSEL FOR THE ASSESSEE. HONBLE SUPREME COURT IN THE CASE OF SCIENTIFIC ENGINEERING HOUSE P. LTD. VS. CIT 7 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA (SC) 157 ITR 86 DEALING WITH THE ISSUE OF WHETHER THE DRAWINGS, DESIGNS, CHARTS, PLANTS ETC. CONSTITUTE A PLANT AND ARE ENTITLED TO DEPRECIATION, HON'BLE SUPREME COURT HELD IN THE AFFIRMATIVE CASE ON PAGE NO 97 OF THE REPORT AS UNDER: OBVIOUSLY, THE PURPOSE OF RENDERING SUCH DOCUMENTATION SERVICE BY SUPPLYING THESE DOCUMENTS TO THE ASSESSEE WAS TO ENABLE IT TO UNDERTAKE ITS TRADING ACTIVITY OF MANUFACTURING THE ODOLITES AND MICROSCOPES AND THERE CAN 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 ASSESSEES 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 AND ACCORDINGLY, IT IS CLEAR THAT THE INCOME ARISING TO THE ASSESSEE IS IN THE NATURE OF BUSINESS INCOME. 31. A SIMILAR ISSUE AROSE BEFORE JAIPUR BENCH OF THE ITAT IN THE CASE OF MODERN THREADS (INDIA) LIMITED V DCIT 69 ITD 115(JP), WHEREIN BRIEF FACTS WERE THAT MODERN THREADS, AN INDIAN COMPANY WAS INTERESTED IN BUILDING IN INDIA A PLANT FOR THE PRODUCTION OF PTA. IT, THEREFOR, ENTERED INTO AN AGREEMENT WITH TECNOMINT SPA., A TAX RESIDENT OF ITALY ENTERED FOR GRANT OF RIGHTS AND SUB-LICENSE TO USE THE PROCESS AND TECHNICAL KNOW-HOW FOR DESIGNING, CONSTRUCTION AND OPERATION OF THE PLANT. THE AGREEMENT, INTER ALIA, PROVIDED FOR LUMP SUM TECHNICAL KNOW-HOW FEE OF USD 250 LAKHS AND USD 50 LAKS FOR SUPPLY OF BASIC PROCESS ENGINEERING DOCUMENTATION. THE ISSUE WAS WHETHER THE PAYMENT FOR THE SUPPLY OF TECHNICAL KNOW-HOW AND BASIC PROCESS ENGINEERING DOCUMENTATION FOR DESIGNING, CONSTRUCTION AND OPERATION OF THE PLANT COULD BE TAXED AS ROYALTY OR NOT? ITAT ON PAGE NO. 157 OF THE REPORT HELD AS UNDER: HAVING REGARD TO THE FACTS, MATERIAL ON RECORDS AND RATIO OF VARIOUS DECISION(S) CITED I COME TO THE IRRESISTIBLE CONCLUSION THAT THE AMOUNT PAYABLE 8 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA TO ITALIAN COMPANY FOR SUPPLY OF TECHNICAL KNOW-HOW AND BASIC PROCESS ENGINEERING DOCUMENTATION FOR SETTING OF THE PLANT IN INDIA FOR MANUFACTURING OF PTA IS THE BUSINESS PROFIT IN THE HANDS OF ITALIAN COMPANY AND THE ITALIAN COMPANY HAVING NO PERMANENT IN INDIA THE SAME IS TAXABLE IN ITALY AND NOT IN INDIA. THE REVENUE AUTHORITIES ARE, THEREFORE, NOT JUSTIFIED IN TAXING THE SAID PAYMENTS IN INDIA TREATING THE SAME AS ROYALTY . (EMPHASIS SUPPLIED) 32. THE REVENUE AUTHORITIES HAS ASKED ASSESSEE TO EXPLAIN AS TO WHY THE REVENUE SALE OF DESIGN AND DRAWING MADE BY THE COMPANY IN THE FY 2009-10 SHOULD BE CONSIDERED AS NON- TAXABLE, WHERE, AS PER THE VARIOUS CONTRACTS IN RESPECT OF THE ABOVE MENTIONED SERVICES, THE ULTIMATE OWNERSHIP OF THE DESIGNS AND DRAWINGS ARE NEVER PASSED TO THE BUYER, AND ONLY LICENSE TO USE THE SAME IS GRANTED. IN THIS WAY, THE TRUE NATURE OF THE RECEIPTS ARE ROYALTIES UNDER SECTION 9(1)(VI) OF THE INCOME TAX ACT, 1961 AND ARTICLE 12 OF INDIA-GERMANY DTAA RATHER THAN SALE OF DESIGNS AND DRAWINGS AS A PRODUCT. IT WAS EXPLAINED THAT THE NATURE OF RETAINING INTELLECTUAL PROPERTY IN DESIGNS AND DRAWINGS, DUE TO WHICH THE OWNERSHIP HAS NEVER 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 CONVENTIONS BY KLAUS VOGEL. THE RELEVANT EXTRACT IS REPRODUCED BELOW: .IN A PARTIAL TRANSFER OF RIGHTS THE CONSIDERATION IS LIKELY TO REPRESENT A ROYALTY ONLY IN VERY LIMITED CIRCUMSTANCES. ONE SUCH CASE IS WHERE THE TRANSFEROR IS THE AUTHOR OF THE SOFTWARE (OR HAS ACQUIRED FROM THE AUTHOR HIS RIGHTS OF DISTRIBUTION AND REPRODUCTION) AND HE HAS PLACED PAT OF HIS RIGHTS AT THE DISPOSAL OF A THIRD PARTY TO ENABLE THE LATTER TO DEVELOP OR EXPLOIT THE SOFTWARE ITSELF COMMERCIALLY FOR EXAMPLE BY DEVELOPMENT AND DISTRIBUTION OF IT . THE ACQUISITION OF THE SOFTWARE WILL GENERALLY BE FOR THE PERSONAL OR BUSINESS USE OF THE PURCHASER. THE PAYMENT WILL THEN FALL TO BE DEALT WITH AS COMMERCIAL INCOME IN ACCORDANCE WITH ARTICLE 7 OR 14. IT IS OF NO RELEVANCE THAT THE SOFTWARE 9 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA IS PROTECTED BY COPYRIGHT OR THAT THERE MAY BE RESTRICTIONS ON THE USE TO WHICH THE PURCHASER CAN PUT IT.(EMPHASIS SUPPLIED) 33. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE VARIOUS OBSERVATIONS MADE IN THE MODEL CONVENTION OF OECD 2010 ON THE ARTICLE 12 I.E. ROYALTIES AND FEE FOR TECHNICAL SERVICES. THE RELEVANT PARAS ARE OUTLINED BELOW: 131. PAYMENTS MADE FOR THE ACQUISITION OF PARTIAL RIGHTS IN THE COPYRIGHT (WITHOUT THE TRANSFER OR FULLY ALIENATING THE COPYRIGHT RIGHTS) WILL REPRESENT A ROYALTY WHERE THE CONSIDERATION IS FOR GRANTING OF RIGHTS TO USE THE PROGRAM IN A MANNER THAT WOULD WITHOUT LICENCE, CONSTITUTE AN INFRINGEMENT OF COPYRIGHT. EXAMPLES OF SUCH ARRANGEMENTS INCLUDE LICENCES TO REPRODUCE AND DISTRIBUTE TO THE PUBLIC SOFTWARE INCORPORATING THE COPYRIGHTED PROGRAM, OR TO MODIFY AND PUBLICLY DISPLAY THE PROGRAM. IN THESE CIRCUMSTANCES, THE PAYMENTS ARE FOR THE RIGHT TO USE THE COPYRIGHT IN THE PROGRAM (I.E. TO EXPLOIT THE RIGHTS THAT WOULD OTHERWISE BE THE SOLE PREROGATIVE OF THE COPYRIGHT HOLDER). 13. IN OTHER TYPES OF TRANSACTIONS, THE RIGHTS ACQUIRED IN RELATION TO THE COPYRIGHT ARE LIMITED TO ENABLE THE USER TO OPERATE THE PROGRAM, FOR EXAMPLE, WHERE THE TRANSFEREE IS GRANTED LIMITED RIGHTS TO REPRODUCE THE PROGRAM. THIS WOULD BE THE COMMON SITUATION IN TRANSACTIONS FOR THE ACQUISITION OF A PROGRAM COPY. THE RIGHTS TRANSFERRED IN THESE CASES ARE SPECIFIC TO THE NATURE OF COMPUTER PROGRAMS. THEY ALLOW THE USER TO COPY THE PROGRAM, FOR EXAMPLE ON TO THE USERS COMPUTER 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 COMPUTERS 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 TRANSFEREE IS NOT RELEVANT. FOR EXAMPLE IT DOES NOT MATTER WHETHER THE TRANSFEREE ACQUIRES A COMPUTER DISK CONTAINING A COPY OF THE PROGRAM OR DIRECTLY RECEIVES A COPY ON THE HARD DISK OF HER COMPUTER VIA A MODEM CONNECTION. IT IS ALSO OF RELEVANCE THAT THERE MAY BE RESTRICTION ON THE USE TO WHICH TRANSFEREE CAN PUT THE SOFTWARE. 10 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA 34. FURTHER, THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF GEOQUESTE SYSTEMS B.V. IN RE., 327 ITR 1(AAR) DEALING WITH THE NON-TAXABILITY OF PAYMENT FOR SOFTWARE, HELD THAT PAYMENTS WOULD NOT CONSTITUTE ROYALTY SINCE THE LICENSED PRODUCT COULD NOT BE COMMERCIALLY EXPLOITED BY THE LICENSEE/CUSTOMER. THIS WAS DESPITE THE FACT THERE WERE CLAUSES REGARDING THE RESTRICTION ON INTELLECTUAL PROPERTY. IN THIS REGARD, THE AAR IN THE CAPTIONED CASE, AT PAGE NO 113 OF THE REPORT, HELD AS UNDER: THERE IS ALSO A SPECIFIC PROVISION IN BOTH THE AGREEMENTS THAT INTELLECTUAL PROPERTY RIGHTS WOULD ALWAYS REMAIN WITH THE OWNER OF THE PRODUCT OR THE LICENSOR. SUCH RESTRICTIONS PLACED ON THE USER OF SOFTWARE AND THE FACT THAT THE LICENSE/CUSTOMER HAD NO RIGHT TO INTERFERE WITH SOURCE CODE AND THAT THE LICENSED PRODUCE CANNOT BE COMMERCIALLY EXPLOITED BY THE LICENSE/CUSTOMER ARE INCONSISTENT WITH THE INFERENCE THAT THE RIGHTS IN RESPECT OF COPYRIGHT OR THE RIGHT TO USE THE COPYRIGHT OF THE COMPUTER PROGRAMMER HAVE BEEN CONVEYED TO THE CUSTOMER. FURTHER, THERE IS NOTHING IN THE AGREEMENT TO SUGGEST THAT THE UNDERLYING TECHNICAL KNOWLEDGE IN DEVELOPING THE SOFTWARE HAS BEEN TRANSFERRED. NOTWITHSTANDING THE GRANT OF AUTHORITY TO USE THE LICENSE (ON NON-EXCLUSIVE AND NON-TRANSFERABLE BASIS), THE COPYRIGHT IMBEDDED IN THE SOFTWARE REMAINS WITH THE OWNER INTACT. 35. THE PRINCIPLE OF LICENSE AND COPYRIGHT WAS ALSO DISCUSSED BY THE AAR IN THE CASE OF DASSAULT SYSTEMS K.K. IN RE. 322 ITR 125(AAR),ON PAGE NO 144 OF THE REPORT, HELD THAT PASSING ON A RIGHT TO USE AND FACILITATING THE USE OF A PRODUCT FOR WHICH THE OWNER HAS A COPYRIGHT IS NOT THE SAME THING AS TRANSFERRING OR ASSIGNING RIGHTS IN RELATION TO THE COPYRIGHT. THE ENJOYMENT OF SOME OR ALL THE RIGHTS WHICH THE COPYRIGHT OWNER HAS, IN NECESSARY TO TRIGGER THE ROYALTY DEFINITION. VIEWED FROM THIS ANGLE, A NON-EXCLUSIVE AND NON-TRANSFERABLE LICENCE ENABLING THE USE OF A COPYRIGHTED PRODUCT CANNOT BE CONSTRUED AS AN AUTHORITY 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 11 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA MAKE OUT COPIES AND DISTRIBUTE THEM WITHIN A SPECIFIED TERRITORY, THE GRANTEE WILL PRACTICALLY STEP INTO THE SHOES OF THE OWNER/GRANTOR AND HE ENJOYS THE COPYRIGHT TO THE EXTENT OF ITS GRANT TO THE EXCLUSION OF OTHERS. WE MAY IN THIS CONTEXT USEFULLY REFER TO THE WELL-REASONED OPINION EXPRESSED BY OECD IN ITS COMMENTARY ON ARTICLE 12. TRANSFERS OF RIGHTS IN RELATION TO SOFTWARE OCCUR IN MANY DIFFERENT WAYS RANGING FROM THE ALIENATION OF THE ENTIRE RIGHTS IN THE COPYRIGHT IN A PROGRAMME TO THE SALE OF A PRODUCT WHICH IS SUBJECT TO RESTRICTIONS ON THE USE TO WHICH IT IS PUT..THEREFORE, RIGHTS IN RELATION TO THESE ACTS OF COPYING, WHERE THEY DO NO MORE THAN ENABLE THE EFFECTIVE OPERATION OF THE PROGRAMME BY THE USER, SHOULD BE DISREGARDED IN ANALYZING 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 . THE METHOD OF TRANSFERRING THE COMPUTER PROGRAMME TO THE TRANSFEREE IS NOT RELEVANT. FOR EXAMPLE, IT DOES NOT MATTER WHETHER THE TRANSFEREE ACQUIRES A COMPUTER DISK CONTAINING A COPY OF THE PROGRAMME OR DIRECTLY RECEIVES A COPY ON THE HARD DISC OF HER COMPUTER VIA A MODEM CONNECTION. IT IS ALSO OF NO RELEVANCE THAT THERE MAY BE RESTRICTIONS ON THE USE TO WHICH THE TRANSFEREE CAN PUT THE SOFTWARE. 36. FROM THE ABOVE SUBMISSIONS READ WITH JUDICIAL PRECEDENTS, IT IS CLEAR THAT THE RESTRICTION ON INTELLECTUAL PROPERTY WOULD NOT MAKE ANY DIFFERENCE SINCE THE DESIGNS AND DRAWINGS SOLD BY THE ASSESSEE WERE USED BY THE INDIAN CUSTOMERS FOR INTERNAL PURPOSE OF SETTING UP PLANTS AND NOT FOR COMMERCIAL EXPLOITATION. IN VIEW THEREOF, THE INCOME EARNED BY THE ASSESSEE IS NOT TAXABLE BOTH UNDER THE ACT AND THE DTAA. FURTHER, THE ASSESSEE ARGUED THAT THOUGH THE ITSC IN THE FINAL ORDER PASSED FOR FYS 2007-08 AND 2008-09 HAS HELD THAT THE PAYMENT FOR DESIGNS AND DRAWINGS WOULD BE TAXABLE AS ROYALTY AND FEE FOR TECHNICAL SERVICES @ 10% ON GROSS BASIS, HOWEVER THE ASSESSEE DOES NOT AGREE WITH THE SAID OBSERVATION. IN THIS REGARD, THE ASSESSEE HAS ALSO FILED A LETTER DATED MARCH 07, 2012 WITH THE AO AND DRP THAT THE ASSESSEE HAS ACCEPTED THE ORDER OF THE ITSC ON THIS ISSUE MERELY TO BUY PEACE OF MIND AND TO AVOID PROTRACTED LITIGATION WITH THE REVENUE. 37. FROM THE ABOVE FACTS AND LEGAL POSITION, IT IS CLEAR THAT THE BASIC ENGINEERING PACKAGES SOLD BY THE ASSESSEE TO THE INDIAN CUSTOMERS 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 12 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA 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. THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 16. THE SIMILAR ISSUE WAS CONSIDERED IN THE GROUP CASE OF THE ASSESSEE IN THE CASE OF OUTOTEC GMBH VS. DCIT IN ITA NO.160 & 193/KOL/2016 FOR ASSESSMENT YEAR 2012-13 WHEREIN THE DECISION IN THE CASE OF OUTOTEC GMBH VS. DCIT IN ITA NO.431 & 432/KOL/2014 (SUPRA) WAS FOLLOWED. THE FINDINGS OF THE HONBLE DRP WAS THAT THE TRANSACTIONS IS IN THE NATURE OF FTS THAT (I) THE ASSESSEE HAD ACCESS TO A WIDE RANGE OF TECHNOLOGIES FOR THE PURPOSE OF SETTING UP/CONSTRUCTION OF THE PLANTS, (II) IT WAS DEVELOPED AFTER RESEARCH AND AFTER NECESSARY MODIFICATION AND THEREAFTER (III) THESE DESIGNS AND DRAWINGS WERE SOLD TO INDIAN CUSTOMERS WHO USED THE SAME FOR INTERNAL BUSINESS PURPOSE OF SETTING UP OF THEIR PLANTS. THESE FINDINGS WERE REVERSED AND THE GROUND OF APPEAL OF THE ASSESSEE WAS ALLOWED. 17. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE HOLD THAT THE INCOME FROM SALE OF DESIGNS AND DRAWINGS CANNOT BE CLASSIFIED, EITHER AS ROYALTY OR AS FTS. THE INCOME HAS TO BE CONSIDERED AS BUSINESS INCOME AND AS THE ASSESSEE DOES NOT HAVE PE IN INDIA, IT CANNOT BE BROUGHT TO TAX IN INDIA. 18. ON THE ISSUE OF TAXABILITY OF INCOME FROM TESTING AND OTHER SERVICES, THE UNDISPUTED FACT IS THAT THESE SERVICES WERE RENDERED OUTSIDE THE COUNTRY I.E. IN FINLAND. ARTICLE 12(5) OF THE INDIA FINLAND DTAA READS AS FOLLOWS: 5. ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN A CONTRACTING STATE WHEN THE PAYER IS THAT STATE ITSELF, A POLITICAL SUB-DIVISION, A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER, THE RIGHT OR PROPERTY FOR WHICH THE ROYALTIES ARE PAID IS USED WITHIN A 13 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA CONTRACTING STATE OR THE FEES FOR TECHNICAL SERVICES RELATE TO SERVICES PERFORMED, WITHIN A CONTRACTING STATE, THEN SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN THE STATE IN WHICH THE RIGHT OR PROPERTY IS USED OR THE SERVICES ARE PERFORMED. WHERE, HOWEVER, THE PERSON PAYING THE ROYALTIES OR FEES FOR TECHNICAL SERVICES, WHETHER HE IS A RESIDENT OF A CONTRACTING STATE OR NOT, HAS IN A CONTRACTING STATE A PERMANENT ESTABLISHMENT OR A FIXED BASE IN CONNECTION WITH WHICH THE LIABILITY TO PAY THE ROYALTIES OR FEES FOR TECHNICAL SERVICES WAS INCURRED, AND SUCH ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE BORNE BY SUCH PERMANENT ESTABLISHMENT OR FIXED BASE, 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 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. 22. THE ASSESSEE ARGUES 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. THE 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 OUTSIDE INDIA. 14 I.T.A. NO.2601/KOL/2018 OUTOTEC (FINLAND) OY, KOLKATA BUT THE PAYMENT IN QUESTION IS NOT FOR THE PROCESS BUT WAS FOR THE RESULTS OF TESTING WHICH IS USED IN INDIA. THE ARGUMENT OF THE LD. D/R THAT THESE SERVICES WERE AVAILED IN INDIA AND HENCE ARE TAXABLE IN INDIA HAS TO BE UPHELD. HENCE, WE AGREE WITH THE FINDING OF THE ASSESSING OFFICER AS UPHELD BY THE DRP ON THIS ISSUE. IN THE RESULT, THIS GROUND OF THE ASSESSEE IS DISMISSED. 23. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED IN PART. KOLKATA, THE 31 ST MAY, 2019. SD/- SD/- [ S.S.VISWANETHRA RAVI ] [J. SUDHAKAR REDDY] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED :31.05.2019 (RS, SR. PS) COPY OF THE ORDER FORWARDED TO: 1.OUTOTEC(FINLAND) OY, C/O OUTOTEC INDIA PVT. LTD., 12 TH FLOOR, SOUTH CITY PINNACLE, PLOT NO.XI, BLOCK-EP, SECTOR-V, SALT LAKE, KOLKATA 700091. 2. DCIT (INTERNATIONAL TAXATION), CIRCLE-2(1), KOLKATA. 3. CIT(A)- 4. CIT- , 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, KOLKATA BENCHES