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“Make available” – Payment towards supply of designs & drawings whether Royalty u/s 9(1)(vi)?

Jan 29, 2019

The ’make available‘ clause in respect of Fees for Included Services (FIS)/ Fees for Technical Services (FTS) is more or less similarly defined under the Income Tax Act and under several DTAAs. We have various HC, AAR and ITAT rulings that have held that an amount paid for technical services would be considered as FTS only if the services paid for ‘made available’ the technical knowledge, experience, skill, know-how or processes. In 2017, the Gujarat HC order reported in [TS-6865-HC-2017(Gujarat)-O] admitted an appeal filed by the Revenue against the ITAT’s order, holding that payment made to a non-resident company did not fall within the definition of Fees for Technical Services in view of the ’make available‘ clause in the concerned treaty, although the AO had given a categorical finding that ‘make available’ clause is not necessary for treating a payment as Fees for Included Services under the DTAA, as there is development & transfer of a technical plan or technical design to the assessee by the Canadian party. 

In the “Taxsutra Database Insight”, we have compiled 30 rulings on issues arising specifically on the question whether payments towards supply of designs & drawings are “Royalty” u/s 9(1)(vi)” or FTS/ FIS. Some of these cases have also examined whether the foreign entity had a PE in India. 

1) [TS-5872-ITAT-2019(Mumbai)-O] - ITAT: 'Make available' condition relevant for supply of designs/ drawings; Applies ‘ejusdem generis’ –  Mumbai ITAT rules that amount received by assessee (a UK resident) towards supply of technical designs, drawings, plans, etc. to Indian entity under a consulting engineering services contract is not FTS u/Art 13(4)(c) of India-UK DTAA for AY 2012-13, absent satisfaction of ‘make available’ condition.

2) [TS-5827-HC-2019(Punjab & Haryana)-O] - HC: Payment to Austrian Co for supply of designs/ drawings, not ’royalty‘ - Punjab & Haryana HC reverses ITAT order, holds that consideration paid by assessee [an Indian co.] for supply of drawings, designs, specifications/ processes and other technical details to an Austrian company in relation to manufacturing of vehicles was not ‘royalty‘ under India-Austria DTAA; Sec. 195 TDS not applicable. 

3) [TS-5916-ITAT-2019(DELHI)-O] - ITAT: Payment for obtaining geophysical and geological data not FTS/ Royalty under India-USA DTAA – Maps/ designs are nothing but a way to interpret the data, and cannot be equated to development and transfer of technical maps and designs as contemplated by AO/ CIT (A). 

4) [TS-7245-ITAT-2019(KOLKATA)-O] - ITAT: 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 Finland-based assessee does not have PE in India, it cannot be brought to tax in India. 

5) [TS-5364-HC-2017(Delhi)-O] - HC: Concurs with ITAT findings that under the export agreement, no patent, invention, model, design or secret formula had been transferred to the assessee, nor had the assessee been permitted to use any of the above. Similarly, under the export agreement, the foreign company has not rendered any managerial, technical or consultancy services; In view of this, it was held that export commission was neither Royalty nor Fees for Technical Services, and therefore, the assessee was not required to deduct tax at source on payment of export fee. Del HC held that once it was held that the assessee was not required to deduct tax at source, it cannot be said that the assessee had failed to deduct tax at source to justify application of Sec. 40(a)(ia). 

6) [TS-5530-ITAT-2016(AHMEDABAD)-O] – ITAT: Payment for Interpreting 3D seismic data not FTS; ’Make available‘ test not satisfied - ITAT allows assessee’s appeal for AY 2011-12, holds that payments for 3D Seismic Data Interpretation services not FTS u/Art 13 of India- UK DTAA as services do not ’make available‘ technical expertise, skill or knowledge and hence, TDS u/s 195 not deductible; ITAT observes that the assessee had provided the initial data and the non-resident was only required to provide the interpretation report of such data. 

7) [TS-5694-ITAT-2016(Bangalore)-O] – ITAT: Upholds royalty taxation; Services under management agreement resulted in imparting commercial experience - Bangalore ITAT rules in favour of the Revenue, holding that amount received by UK resident from its Indian affiliate under Management & Administration Services (MSA) agreement (for rendering services such as business policy advice, market research, market analysis, evaluation of business opportunities, management information, etc.) constitutes royalty towards supply of commercial information concerning commercial experience under both IT Act and the treaty; ITAT holds that "where a reasonable apportionment is not possible, then the other part of the services could also be given the tax treatment as given to one part of the services provided, which constitute the principal purpose of the contract and falling under the purview of royalty", thus upholds Revenue’s stand that entire consideration was taxable as royalty.

8) [TS-6141-ITAT-2016(Pune)-O] – Mere passing of project specific architectural drawings & designs with measurements does not amount to ‘making available’ technical knowledge, know-how or process” – Pune ITAT: payment to non-resident towards project-specific drawings/ designs not FTS absent transfer of technology – allows assessee’s (an Indian company) appeal for AYs 2008-09 & 2009-10, holding that payment towards ’project- specific‘ designs, drawings and building plans to a US entity were not royalty/ FTS under India-USA DTAA; Notes that (i) payee did not have a PE in India; (ii) services were rendered from its office in USA, (iii) there was no transfer of copyright in scientific work/ technology/ technical know-how, etc. by the payee; (iv) there was no transfer of title in drawing and designs, which were “project specific” and thus not usable for other projects; Therefore opines that “no technical know-how was ‘made available’ to assessee so as to bring assessee’s payments within the meaning of ’Fees for Included Services’. 

9) [TS-5637-ITAT-2016(Mumbai)-O] – ITAT:  Use of ‘copyrighted article’ - In-flight magazine advertisements revenue share with airline not liable for TDS u/s 194C for AY 2007-08 – Mumbai ITAT holds that agreement between assessee and airline was for sharing of incremental advertisement revenue, and cannot be said to be in the nature of works contract; Separately, ITAT holds that payment to Singapore and UK entities for procuring images/ photographs for exclusive one-time use for publication in the magazine, not ‘royalty’ under respective DTAAs. 

10) [TS-6598-ITAT-2015(KOLKATA)-O] – ITAT: Offshore supply of designs/ drawings for setting up plants not ’royalty‘, absent commercial exploitation – Kolkata ITAT rules that income to German co. ('assessee') from supply of designs/ drawings in India is business income, and not royalty, as it tantamounts to ‘use of copyrighted article’ rather than ‘use of a copyright’; Notes that designs/ drawings were used by the Indian customers for setting up their plants and not for any other commercial exploitation, therefore partake the character of 'sale of product', taxable as 'business income'. 

11) [TS-70-ITAT-2015(DELHI)-O] - ITAT : Propounds source rule for 'royalty payments'; Situs of 'technology use' is determinative factor – Delhi ITAT rules on taxability of royalty received by assessee (a US company) from foreign Original Equipment Manufacturers (‘OEMs’) on sale of handsets and equipment to Reliance and Tata group in India; On assessee’s reliance on co-ordinate bench ruling in its own case for earlier year (holding ‘royalty’ not taxable in India), Tribunal calls for further investigation of facts before taking call on following earlier year’s order; Acknowledges that the actual controversy was where the royalty paid will be taxable – whether in the tax jurisdiction in which the handsets are manufactured, i.e. the situs of manufacture of handsets, or in the tax jurisdiction where the handsets are used, i.e. the situs of use of handsets.; Rules that when royalty is for use of a technology in manufacturing, it is to be taxed at the situs of manufacture, and when royalty is for use of technology in functioning of the product manufactured, it is to be taxed at the situs of use. Matter remitted to examine this point; Propounds source theory on royalty payments, refers to royalty definition under the Act, in conjunction with Sec. 9(1)(vi)(c) and rules that ’taxation of royalties is in the source jurisdiction in which related business is being carried on by a person, rather than the jurisdiction in which he is tax resident’; States that royalties shall be taxable to the extent used in “a business or profession carried on by him (i.e. a non-resident) in India”; Notes that OEM manufactured the handsets outside India by using patents licensed by assessee; However, this fact per se does not enlighten about whether OEM’s business was carried out entirely outside India, holds that, manufacturing is an important part of business but the business per se is little more than manufacturing.

12) [TS-6347-ITAT-2015(Delhi)-O] – ITAT: Design review payments not FTS absent ‘make available’ under Finland treaty - Payment by assessee to Finnish co. for reviewing design/ drawings prepared by contractor to ensure quality is not Fees for Technical Services (’FTS’) u/Art 13 of India-Finland DTAA, TDS u/s 195 not applicable; Article 13(4)(c) of DTAA provides that FTS means payment for providing services which ‘make available’ technical knowledge, experience, skill, know-how or processes, or consist of development & transfer of a technical plan or technical design; As India-Finland DTAA does not define the term ‘make available’, ITAT relies on MoU to India-US DTAA, since Finnish co.‘s services not driven towards ’imparting‘ technical knowledge or experience that could be used by the assessee independently in its business and without recourse to Finnish co., holds services not ‘made available’ to assessee as per first limb of Art 13(4)(c); Moreover, as Finnish co. not responsible for preparation of any design/ drawing for assessee, payment not FTS as per second limb of Art 13(4)(c). 

13) [TS-226-HC-2014(Delhi)-O] – HC : If design & engineering services are inextricably linked with manufacture & fabrication of offshore supplies so as to form integral part of such supplies, then consideration for such services not taxable as FTS u/s 9(1)(vii); To fall outside scope of Sec. 9(1)(vii) of the Act, the link between supply of equipment & services must be so strong & interlinked that the services in question are not capable of being considered as services on standalone basis and are therefore subsumed as a part of the supplies. 

14) [TS-686-ITAT-2014(PUNE)-O] – ITAT: Holds consideration for plant know-how in connection with plant erection, not ‘royalty’ – Pune ITAT rules on taxability of payments by assessee to Israeli company, pursuant to Technology License agreement; In view of HP HC ruling reported in [TS-5799-HC-2009(Himachal Pradesh)-O] , holds that payment for acquisition of Plant know-how in connection with erection of plant & machinery not ’royalty’, hence not taxable in India; However, holds payment for obtaining technical product or process know-how is ‘royalty’ under the Act, hence subject to Sec 195. 

15) [TS-450-HC-2014(BOMBAY)-O] – HC: Revenue from supply of equipment not Royalty; No transfer of rights included – Bom HC upholds ITAT's order, holds revenue earned by Danish company from supply of equipment to Indian party, not royalty u/s 9(1)(vi); Though technical information in form of flowcharts and designs was provided along with equipment supply, it only related to its installation; Further, the supply contract postulates payment for supply of equipment only; Analysing contract in detail, ITAT had found that there was no transfer of rights in the nature contemplated by definition of royalty u/ Expln 2 to Sec 9(1)(vi); ITAT had observed that it was not AO's case that assessee supplied copyright, design or other information enabling Indian buyer to manufacture; As assessee had no PE in India, holds that revenue for supply of equipment not taxable in India. 

16) [TS-108-ITAT-2014(Delhi)-O] – ITAT: Income from design & engineering services: Service consideration in-built in offshore equipment supply price taxable in India; Del ITAT notes that assessee-foreign company’s contract with Indian buyer for offshore & onshore supply of equipment & services not a composite contract as consideration for each component was distinctly identifiable; Consideration for offshore supply of equipment not taxable in India when property in goods passes outside India; Assessee undertook to bear training cost without there being separate consideration, and therefore, price of offshore supply of equipment to be split into price for goods simplicitor and compensation for training & other charges; While profit on offshore supply of equipment not taxable in India, compensation for services rendered in India taxable under IT Act as well as under DTAA; Rejects assessee's argument that consideration for design & engineering be considered as part of equipment supplied by assessee from abroad; Drawing & design specially customized for particular project, not capable of any other use and hence, not taxable as Royalty; Such consideration taxable as FTS u/s 9(1)(vii), rejects assessee's argument that if services not rendered in India, it can't be taxed in India; Assessee not right in claiming that amount received during relevant year was only an advance for project and hence, not taxable in relevant year; Point of taxation is actual supply of goods/ actual rendition of services, not when invoice is raised as per terms of contract. 

17) [TS-6899-ITAT-2013(Ahmedabad)-O] – ITAT: Payment to UK Co for transfer of fabric designs taxable as FTS – ITAT  holds that payment to UK-based consultant for providing fabric designs amounts to FTS as per India-UK DTAA; Design supplied to Indian assessee becomes its property; Assessee able to ‘apply’ such designs for producing garments; Assessee may also sell/ transfer such designs to third party; Kar HC ruling in De Beers and Delhi HC ruling in Guy Carpenter’s case distinguished. 

18) [TS-312-HC-2012(KAR)-O] – HC: Mere fact that there were certain technical inputs or that the assessee immensely benefited from services rendered, resulting in value addition to assessee’s employees, is wholly irrelevant. Kar HC holds that the expression ‘make available’ has a specific meaning in the context of tax treaties, and there is no need to adopt the day-to-day meaning of this expression. 

19) [TS-108-HC-2011(DELHI)-O] – HC: Outright sale/ transfer of drawings, designs or know-how – Technology transfer payment not royalty under UK treaty – Del HC held that the agreement with non-resident was in respect of ‘transfer’ of technical information and know-how related to trade secrets, designs, drawings, etc. on a non-exclusive basis, and payment was not for mere ‘usage’ of IPR. HC holds that payment was towards ’sale‘ and was not taxable as ‘royalty’ under India-UK DTAA, observed that the scope of definition of "royalty" under UK treaty was narrower than definition u/s 9 of the Act. 

20) [TS-5001-AAR-2010-O] – AAR holds that sums received by consultant under service agreement for supply of architectural designs & drawings are in nature of ’FTS‘ u/s 9(1)(vii) of the Act and u/Art 12.4 of the India-Germany DTAA, and cannot be regarded as consideration for sale of designs & drawings. 

21) [TS-5014-AAR-2010-O] – AAR: Architectural design services – Agreement for development & sale of designs, consultancy for construction documents and ‘construction administration’ have to be viewed as a whole for determining taxability – Entire consideration receivable by HOK (non- resident entity) from Indian assessee held by AAR to be liable to be taxed in India as Fees for Included Services (FIS) as per Art 12.4 of India-USA DTAA; Remittances to HOK for making payments to consultants in USA for services rendered outside India not taxable under IT Act in India. Payment of fees for technical advisory services at construction document stage cannot be considered as ancillary & subsidiary to sale of property, therefore not excluded from para 4 of Art 12 by virtue of cl. (a) of Art 12.5 of India-USA treaty; AAR separately holds that 10% rate u/s 115A(1)(b)(BB) applies to income from Fees for Technical/ Included Services as it is less than rate specified in treaty. 

22) [TS-5022-AAR-2009-O] – AAR: Sale and transfer of technology know-how -- Consideration received by Applicant (incorporated in USA) towards technology transfer/ technical know-how and services connected therewith are taxable as royalty u/s 9(1)(vi) -AAR notes that though there is substantial similarity between Art 12 and Sec. 9(1)(vi) of the IT Act, the definition of ‘royalties’ under Treaty is more restrictive in scope than definition in Expln 2 to Sec. 9(1)(vi). In contrast with wider expression used in Expln. 2 to Sec. 9(1)(vi), AAR notes that para 3(a) of the India-USA DTAA uses expression, ’consideration for the use of or the right to use‘. The use or right to use is related to various items enumerated in clause (a) of para 3. Design, plan, secret formula or process are among the enumerated items. Thus, know-how transfer contemplated by clause (2) of the Agreement squarely falls within definition of ‘royalties’ in para 3(a). The payment received by applicant squarely falls within clause (a) of Art 12.3 of the DTAA; AAR separately held that consideration received towards consultancy, assistance and training is liable to be taxed as ‘Fee for Included Services’ under India-USA DTAA and as ‘Fee for Technical Services’ under IT Act; AAR further holds that 10% rate is applicable on income receivable under contract less consideration for transfer of ownership in tread and side wall design/ pattern. 

23) [TS-5799-HC-2009(Himachal Pradesh)-O] – HC: Outright purchase of plant & product know-how from non- resident cannot be construed as ’royalty‘ as defined in Sec. 9(1)(vi) of the Act – The HP HC, placing reliance on SC ruling in [TS-6-SC-1985-O], notes that there is no dispute that even drawings, designs, processing data, etc. constitute plant within meaning of IT Act; The agreement clearly shows that the Indian assessee purchased all drawings, sketches, designs etc, and the foreign company was required to provide technical assistance, if required, but the fact is that no such technical assistance was required nor provided. The payment was the price of the documents purchased, and would not fall within the meaning of ‘royalty’. 

24) [TS-5021-AAR-2004-O] – AAR: Consideration received on transfer of know-how & technical information in form of dossier in Bangkok is receipt on transfer of capital asset, and is not chargeable to tax in India u/s 5(2)(ii) r/w Sec. 9(1)(i) of the Act as the asset was situated outside India. 

25) [TS-5004-AAR-2001-O] – AAR: Payments made to American company towards sale of engineering designs or drawings in ‘out sale of property’ fall within ambit of Art. 12 of India- US DTAA, payment in question cannot be treated as royalty; 

26) [TS-5123-ITAT-1999(MADRAS)-O] – ITAT: Provisions of India-Austria DTAA prevail over provisions of IT Act – Payments by Indian company (TSL) to Austrian company (AVL) towards outright transfer of designs, documents, etc. is of the nature of technical assistance fees and could not be treated as royalty; Mad ITAT notes that as per Art VII of India-Austria DTAA, fees paid by an Indian concern towards technical services to an Austrian enterprise for services rendered outside India not chargeable to tax in India; AVL was not a manufacturer, was only a consultant, had no PE in India, and its services were rendered outside India. AVL had not patented any drawings. Hence, there was no question of AVL permitting TSL ‘right to use patented technical know-how’; ITAT further notes that  certificate filed by Assessee from AVL’s auditor confirming that technical assistance fee was included as technical fees in tax basis for calculating AVL’s income-tax in Austria. AVL had accounted these amounts received as technical fee, and not as royalty in its IT returns; Once Austria, partner to the DTAA, has considered the receipt as technical fees under the DTAA, India, the remaining partner, cannot view it otherwise as both countries are governed by same DTAA. As technical fees were taxable in Austria, question of TDS by Indian company does not arise. 

27) [TS-5543-HC-1999(MADRAS)-O] – HC: No transfer of licence of any patent, invention, model or design – HC holds that supply of design is incidental to performance of total contract, and does not involve licensing of patent concerning machinery, or copyright of its design – HC holds that, Sub-cls. (vi) & (vii) of s. 9(1) did not apply as design was preliminary to manufacture & integrally connected therewith; Mad HC upholds ITAT order, holds that amount paid as part of total contract price towards design & engineering of steam generators supplied by Hungarian company to assessee was not royalty for ss. 9(1)(vi) or 9(1)(vii);  Amount paid did not result in accrual of income to foreign supplier in India. 

28) [TS-5445-HC-1997(Andhra Pradesh)-O] – HC: Lumpsum consideration paid by resident company to non-resident company for supply of designs & drawings towards construction/ installation of kiln is not ‘royalty income’ within meaning of Sec. 9(1)(vi) - ITAT notes that the only services rendered in India were of supervision by expert deputed by foreign company, and there has been supply of materials and knowhow which have both been despatched from abroad; There was no hire of patent rights or technical knowhow on the part of taxpayer in India. The entire payment has been considered as cost of the kiln by the Indian taxpayer, and rightly so; though it is a capital cost to the Indian taxpayer, it can no doubt be a revenue receipt in hands of the recipient. Hence, we are unable to say that the amount was paid for imparting any information concerning the working of, or the use of, a patent, invention, model, design, secret formula, process, trademark or similar property falling u/clause (2) of Expln 2, or for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill within meaning of clause (4) of Expln 2. 

29) [TS-5354-ITAT-1997(Patna)-O] – ITAT: Preparation of designs, drawings and appraisal reports are income qualifying as Fees for Technical Services (FTS)/ Fees for Included Services (FIS) – Patna ITAT notes that orders passed by AO for all 4 years in question were proper, legal and valid, and that the CIT(A) was justified in upholding it. There is no denying the fact that the contracts were for rendering technical assistance in preparation of design, drawings and project reports, and that the payments made to the foreign company were of the nature of FTS. The reimbursement of expenses of the foreign company connected with sending of specialists and their salary, payments in connection with training of Indians in the USSR, payments in connection with preparation of Appraisal Report & Project Report, etc., were all of the nature of FTS. These payments & fees, therefore, clearly fell within the mischief of Sec. 9(1)(vii)( b) of IT Act and not section/s 9(1)(i). 

30) [TS-5991-HC-1990(Calcutta)-O] – HC: Amount received by foreign company for sale of concept designs & drawings does not amount to Royalty - Appellant, a non-resident Hungarian, was to arrange for import of certain concept designs & drawings, enabling it to prepare detailed manufacturing drawings for manufacturing terminal equipments. The Revenue contended that this amount was in the nature of Royalty within the meaning of Expln 2 to Sec. 9(1)(vi). Further, if there is any inconsistency in definitions of Royalty between the DTAA and the Act, the Act would prevail over the DTAA. The Calcutta HC, relying on decision of the AP HC in Visakhapatnam Port Trust and on Circular No. 333 on 2nd April, 1982 issued by the CBDT, rejected the Revenue’s argument and held that ”Whenever any specific arrangement or agreement has been made regarding the taxability of any income under the agreement for Avoidance of Double Taxation, such arrangement or agreement will necessarily prevail over the provisions of the statute”. Further, on whether the impugned amount was in the nature of Royalty, the HC interpreted Art. XIII of the India-UK DTAA and concluded that for a payment to be treated as royalty for purposes of Art.XIII, the owner of such patents, designs or models, plans, secret formula or process, etc., retains the property in them and permits the use or allows the right to use such patents, designs or models, plans, secret formula, etc. In this case, import of the designs & drawings postulates an out-and-out transfer or sale of such designs & drawings, and the non-resident company does not retain any property in them, leaving the grantee to use or exploit them. Hence, the payment in question does not amount to Royalty. Editorial Note: This HC ruling has been approved by SC in [TS-5-SC-2003-O] 


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