TMI Blog2008 (7) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... th Second Vivekananda Bridge Tollway Project. It further narrates that the scope of work requires the preparation by the assessee of design and drawings, that PBAT has the necessary expertise in this field and was willing to provide to the assessee a part of the detailed designs required for the project. The agreement has 15 clauses and some annexures and we shall refer to what is relevant in them for our purpose briefly. Clause 1 provided for "scope of service" and stated that it shall be as set out in Annex. 1. Annexure 1 provided for "detailed scope of services". Briefly stated, it provided for the supply of detail design services for the approach viaduct superstructure of the tollway. It further provided that the design packages shall include preparation and submission of fully dimensioned general arrangement drawings, segment casting data, etc. and also included where the design data and detailed elastometric bearings supporting the approach viaduct and seismic buffers. The detail design submission packages were to include calculations, drawings and reports in accordance with Appendix A of the agreement between Larsen and Toubro and the CES-PBIPL Consortium. It shall also incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a because: (a) the payment was in the nature of business income and since PBAT did not have a permanent establishment (PE) in India the same was not taxable in India under the Indo-Thailand Treaty for Avoidance of Double Taxation; (b) the payment did not represent fees for technical services (FTS) since there is no specific clause dealing with FTS in the above treaty; and (c) the payment was also not covered as "other income" within the meaning of art. 22 of the treaty. 5. The AO took the view that the amount represented "royalty" within the meaning of art. 12 of the double taxation treaty. The assessee objected to the view and stated that it was a case of supply of designs and drawings and thus what was received by PBAT from the assessee represented its business profits and further since the responsibility of PBAT came to an end once the designs and drawings are supplied to the assessee, it cannot be a case of royalty. The AO however did not accept the assessee's contention. He referred to art. 12 of the treaty and concluded as follows: "The payer is making payment for the use of design or model and plan developed by the payee for the use by the payer in executing the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the payment was covered under Expln. 2 below s. 9(1)(vi) of the IT Act as royalty, since the provision used a very wide expression "transfer of all or any rights" and was not restricted to a mere use or right to use the property. According to him, the supply of designs and drawings by PBAT falls within the ambit of "transfer of all the rights" in respect of such designs and drawings and was, therefore, covered by the definition of royalty. The CIT(A) further held that under art. 12.3 of the treaty between India and Thailand, consideration for the alienation of any design or model is also to be considered as royalty. According to him, even under the treaty the definition of "royalty" included consideration for the transfer of the designs and drawings. 8. The CIT(A) therefore agreed with the view taken by the AO that the payment would be royalty both under the IT Act and under the treaty between India and Thailand and confirmed his direction to the assessee to deduct 15 per cent as tax before remitting the money to the Thailand company. 9. The assessee is in further appeal before the Tribunal. It was contended on its behalf that the payment represented consideration for the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in order to highlight the submission that any payment made for the use of the property or the right can only be described as royalty and if there is a sale of the property or the right., the consideration therefor would be taxable only as business profits. Objection was raised to the reference to art. 22 of the treaty by the learned CIT-Departmental Representative on the ground that it was a new point. It was also submitted that it was open to the assessee to contend that the non-resident company did not have PE in India. It was reiterated that the provisions of s. 9(1)(vi) of the Act dealt with species of intellectual property rights or protected rights and did not deal with sale of drawings and designs and, therefore, by no stretch of imagination can the consideration received by PBAT be assessed as royalty. 12. We have carefully considered the rival contentions as well as the authorities relied upon by both the sides. It needs hardly to be stated that the basic principle to be applied in such cases is that one has to first look at the domestic law to find out if the non-resident assessee is taxable thereunder. If it is taxable, only then one needs to look into the treaty, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and we have to examine the nature of the obligations to be performed by PBAT. According to Part 1 of Annex. 1, PBAT has to supply detailed design services for the approach viaduct superstructure 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 Annex. 1 provides for design review of pile foundation, pile-caps, columns and column heads for the approach viaduct superstructure 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 drawing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, 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. 15. In Pro-Quip Corporation, In re, the AAR brought out the distinction between a sale of property and the transfer of the right to use the property in the following words: "There is a well known distinction between the out and out sale of property and allowing use of the property or technical know-how. In the former case property, which may include person's business transferred unconditionally, becomes property of the purchaser. In the latter case the purchaser only gets the right to use the property. The payment in the latter case may be treated as licensing fee or royalty but the payment in the first category of cases cannot be treated as royalty....." Similarly, in CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal), the Calcutta High Court held that the import of designs and drawings postulates an out and out transfer or sale of such designs and drawings and the non-resident company does not retain any property in them leaving the grantee to use or exploit them. It was held that the consideration paid for the transfer of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trademark or similar property shall be treated as royalty and taxed in India. He also relied on cl. (vi) of the Explanation which treated the consideration for the rendering of any services in connection with the activities referred to in cl. (i) as royalty. Strong reliance was placed by him on the words "model" and "design" used in the clause and it was argued by him that the drawings and designs sent by PBAT fell within these expressions and since there was a transfer of all the rights in the drawings and designs in favour of the assessee, the consideration therefor shall be treated as royalty. Turning to art. 12.3 of the double tax treaty with Thailand, the learned CIT-Departmental Representative pointed out that the definition of 'royalty' includes consideration for the "alienation" of any design or model and submitted that in substance the definition of the royalty both under the Act and under the treaty was the same and, therefore, the amount paid by the assessee in the present case to the Thailand company should be treated as royalty notwit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the Supreme Court in Stonecraft Enterprises vs. CIT (1999) 153 CTR (SC) 86 : (1999) 237 ITR 131 (SC) that the word 'minerals' in s. 80HHC of the IT Act should be construed on the basis of noscitur a sociis since it is associated with the words "mineral oil" and "ores". The Supreme Court held that these words taken together are intended to encompass all that may be extracted from the earth. All minerals extracted from the earth, including granite, was therefore, held to be covered by the section. In this decision, reference was made to the earlier judgment of the Court in Pradeep Agarbatti vs. State of Punjab (1997) 8 SCC 511 where it was held that when several articles are grouped together in an entry each word in the entry draws colour from the other words therein in accordance with the principle of noscitur a sociis. In this case, the relevant entry in the Punjab Sales-tax Act read as "cosmetics, perfumery and toilet goods, excluding toothpaste, toothpowder, Kumkum and soap". The word "perfumery" was construed to mean such articles as are used as cosmetics and toilet goods and are used upon the person and it was held that the said word cannot apply to 'Dhoop' or 'Agarb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erary, 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 CIT-Departmental Representative on merits only 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 art. 12(3) of the treaty, having held that it cannot be assessed in India under the IT 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. 20. The learned CIT-Departmental Representative drew our attention to art. 22 of the treaty which deals with "other income". It says that items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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