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2016 (4) TMI 41 - ITAT MUMBAI

2016 (4) TMI 41 - ITAT MUMBAI - TMI - Business income/profits taxable in India as per the DTAA - payment made towards BEDS package for the refinery at Visakhapatnam - tds liability - whether payment is towards purchase of capital asset, that it was not for FIS, as contemplated under Article -12 of DTAA - Held 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 .....

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an-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 pa .....

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/7678/Mum/2007-Brief 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 agreement following sums were payable towards various services and purchase of Basic Engineering 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 trainin .....

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cept 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 .....

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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. 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 .....

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e 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 .....

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greement 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 servic .....

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ee 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, .....

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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. (33 SOT 243), Modern Thread(I). Ltd. (69 ITD 115), Scientific Engineering House(P. )Ltd. (329 ITR 442), Finoarm Sheets Ltd. (152 ITD 77) .....

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ansfer, 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. .....

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in 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 righ .....

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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 .....

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rder 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 .....

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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 f .....

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ax 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 .....

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ndia 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. 19 .....

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ering 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 di .....

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lant 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 knowhow and basic process engineering .....

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ue 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, providin .....

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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. .....

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or 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 sou .....

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ation 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 Pac .....

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