TMI Blog2023 (3) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. In the result, this ground of the assessee is dismissed. Taxability of income earned from sale of designs and drawings - as contended by the assessee that these receipts are not taxable under the provisions of the Act and the India-Finland DTAA - HELD THAT:- As decided in own case [ 2019 (6) TMI 777 - ITAT KOLKATA] findings of the Hon'ble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, 1961 ( the Act ) is bad in law. . 2. Taxability of income earned from testing and other services a. That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the income earned from testing and other services is taxable in India under the provisions of Article 12 of he India- Finland DTAA . b. That on the facts and circumstances of the case and in law, the Ld. A.O passed the draft order without giving the assessee and adequate opportunity of being heard on this issue which is against the principles of natural justice. c. That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in not appreciating the contention that income earned from testing and other services performed entirely in Finland would not be taxable in India in view of the provisions of Article 12 of the India-Finland DTAA. d. That on the facts and in the circumstances of the case and in law, Ld. AO/DRP erred in holding that the income earned from testing and other services in Finland is taxable in India because the result of testing was used by customers in India. 3.Taxability of income from supply of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rate of Tax Income from Technical Service 83,95,883/- @10% Income from Royalty 2,35,540/- @10% 4. In the course of assessment proceedings, Ld. AO treated revenue of Rs.65,14,664/- on account of testing and other services provided by the assessee to Outotec India Pvt Ltd, Hindustan Zinc Ltd, etc. as income from fees for technical services (FTS) on the basis of scope of work extracted from the contract of the assessee with Hindustan Zinc Ltd for Graphite Pre Float Flash Float Study of RAM Ore Type to Maximize Metal Recoveries. On this treatment by the Ld. AO, assessee contended that these tests were conducted in Finland without any employees of the assessee visiting India to render such services and hence the income could not be taxed in India in view of the India Finland Double Taxation Avoidance Agreement (DTAA). Thus, on the issue of income from rendering of testing and other services, assessee company relies on Article 12(5) of the India-Finland DTAA and that the services, in question, had been rendered outside India, it claimed that the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata in the case of the assessee for AY 2015-16 in ITA nos. 2601/Kol/2018 and for AY 2016-17 in ITA No. 2356/Kol/2019 dated 18.10.2022. Accordingly, ground no. 2 in the present appeal is covered by the said decisions against the assessee. In this respect, ld. Counsel stated that assessee has not accepted the said decisions and is in appeal for AY 2015-16 before the Hon ble High of Calcutta vide appeal no. ITA 139/2019, pending for adjudication. 7.1. On the issue of taxability of income from supply of design and drawings, ld. Counsel submitted that this is covered in favor of the assessee by the aforesaid order of the Coordinate Bench in the case of assessee itself for AY 2015-16 reported in [2019] 109 taxmann.com 69 (Kol). He also stated that this issue was also allowed in favor of the assessee s group entity in the following orders by the Coordinate Bench: i) Outotec GmbH s (Group Entity) for AY 2010-11 and AY 2011-12 (ITA No. 431/Kol/2014 and ITA No. 283/Kol/2015) dated 16.06.2015 ii) Outotec GmbH s (Group Entity) AY 2004-05 to AY 2007-08 (ITA No. 274,275,276 277/Kol/2015) dated 31.05.2017 and iii) Outotec GmbH s (Group Entity) AY 2012-13 (ITA No. 160/Kol/2016) dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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, m 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, STARTUP, 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 demonst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade 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 knowhow 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, therefore, 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, construct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 Article7. 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. 34. Further, the Authority For Advance Ruling in the case of GeoQueste SystemsB.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 restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, 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 assesseetantamounts to the use of copyrighted article rather than use of a copyright and is, therefore, in the nature of business income. This issue of assessee's appeal is allowed.' 16. The similar issue was considered in the group case of the assessee in the case of Outotec Gmbh v. Dy. CIT (International Taxation) [2017] 87 taxmann.com 270 (Kol. -Trib.) wherein the decision in the case of Outotec Gmbh (supra) was followed. The findings of the Hon'ble 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. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AO to make the addition and tax @ 10% on gross basis. We find that taxability has arisen under the provisions of India-Finland DTAA. Also, despite the DRP direction, the rate of tax applied by the Ld. AO is as per the Act and not in terms of DTAA. Based on this factual observation, we direct the Ld. AO to recompute the tax liability by adopting the tax under the India-Finland DTAA which is stated to be @ 10% on gross basis. Accordingly, ground taken in this respect is allowed. 16.1. Further, assessee has claimed that levy of surcharge and cess on the income-tax ought not to have been made by the AO. In this respect,ld. Counsel submitted that this issue is already decided in favour of the assessee in its own case in ITA No. 2356/Kol/2019 for AY 2016-17. The finding and observation given in the said order is reproduced is as under: 10. In ground no.3, assessee has raised the issue of levy of surcharge and education cess on the tax computed at the special rate provided under the provisions of Article 12 of the India Finland DTAA. 11. Ld. Counsel for the assessee referred to surcharge of ₹1,26,054/- and education cess of ₹1,92,863/- levied on the tax payable b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws. ARTICLE 11 : INTEREST 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed : (a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ; (b) 15 per cent of the gross amount of the interest in all other cases. (remaining portion of this article is not relevant for the present purposes) ARTICLE 12 : ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here to that the education cess will also be covered by the scope of Article 2. Accordingly, the provisions of Article 11 and 12 must find precedence over the provisions of the Income Tax Act and restrict the taxability, whether in respect of income tax or surcharge or additional surcharge whatever name called, at rates specified in the respective article. In any case, education cess was introduced by the Finance Act 2004, with effect from assessment year 2005-06 which was much after the signing of India Singapore tax treaty on 24t h January 1994. In view of the specific provisions to the effect that the scope of Article 2 shall also cover any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of the taxes referred to in paragraph 1 , and in view of the fact that education cess is essentially of the same nature as surcharge, being an additional surcharge, the scope of article 2 also extends to the education cess. 10. For the reasons set out above, we are of the considered view that the education cess cannot indeed be levied in respect of tax liability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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