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INDIAN OIL CORPORATION LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX

ITAT, MUMBAI l BENCH
R.S. Syal, A.M. & N.V. Vasudevan, J.M.
ITA Nos. 5693, 5694 & 5695/Mum/2003
29th July, 2009
(2010) 128 TTJ (Mumbai) 467 : (2009) 33 SOT 243 : (2010) 35 DTR 69
Section 9(1)(vi), 90, 195, DTAA between India and Australia, art. 6
Asst. Year -,
Decision in favour of Assessee
Counsel appeared :

ORDER
N.V. Vasudevan, J.M. :

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Samir Shah, for the Appellant : Rajiv Nabar, for the Respondent

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These are appeals by the Indian Oil Corporation Ltd. (IOC) against a common order dt. 25th April, 2003 of
learned CIT(A)-XXXI, Mumbai, arising out of order passed under s. 195(2) of the Act. IOC intended to
install in their Gujarat Refinery at Vadodara 5,00,000 TPA bitumen production unit, which can produce
improved and stable bitumen grades, which can meet the specifications of Indian Standard IS 73:1992. The
production was to be done by using vaccum residue from refinery. For the said purpose IOC wanted to
construct and install a plant according to the Biturox process. Biturox process is a process used in
manufacture of bitumen. To use the Biturox process the plant manufacturing bitumen has to be designed in a
particular manner. One Ingenieurgesellschaft MBH, Austria (hereinafter referred to as "Porner") is a licensor
of biturox process from OMV and has a right to grant license in favour of third parties. IOC approached
Porner for setting up a plant for manufacture of bitumen by using Biturox process and the agreement dt. 7th
Aug., 2000 in this regard (copy at pp. 29-58 of the assessees paper book) was entered into between them.
The plant was to be designed to suit particular purpose and specification and the same is set out in ss. 1 and 2
of technical part of the agreement. The scope of work is set out in s. 3 of technical part of the agreement. The
scope of the work consists of several parts : (a) Basic engineering design package (BEDP) (i) which consists
of supply of design for installation and operation of the reactor section, including process layout for the
reactor section. (ii) Design basis (iii) Process description (iv) Process flow diagram (v) Process central
description (vi) Equipment list (vii) Safety and environment related information (viii) Piping and
instrumentation diagram (ix) Piping specification (x) Instrument data sheet (xi) Electrical data (xii)
Supervisory, operating and maintenance manual (xiii) Lincensor standards, etc. The time schedule for supply
of the BEDP was as follows : Time schedule Time schedule for delivery of documents (a) Final design basis
Week 5 (b) Complete set of piping and instrumentation diagrams Week 7 (c) Final issue of BEDP Week 10
Above schedule based on following clients schedule for revisions/approvals (i) Design basis Week 6 (ii)
Revision of piping and instrumentation diagrams Week 8 Supply of proprietary items (FOB basis) (supply
period starts from date of opening L.C.) Total validity period (including commissioning start-up, 19
performance test, training etc.) months (b) Supply and equipment (c) Commissioning and start up (d) Site
supervision and other services on site

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As part of the BEDP, IOC was given a license unlimited in terms of usage by IOC but without any authority
to assign the license alone in favour of third parties.
4. The consideration payable by the IOC for the various services and supplies to be done under the agreement
to Proner is set out in s. 5 of commercial part of the agreement and the same is as follows : "Sec. 5 (5) Prices :
The total contract value shall be US $ 520,926.00 as per following break-up. The above price shall be
inclusive of all taxes, duties and levies applicable outside India. (5.1) Engineering US $ 235,200 Basic
engineering for the reactor section with related know-how package (this amounts includes 2% rebate) (5.2)
Scope of supply FOB Europeans Port Biturox agitator US $ 181,300 Level indicator US $ 15,013 Oxygen
analysator US $ 36,358 Pressurisation equipment US $ 9,329 Sub-total (this amount includes 2% rebate) US $
242,000 (5.3) Commissioning and start up The minimum duration for commissioning and start-up including
performance test and training on site is 30 working days (10 hours basis) based on this period. Proner charges
a : Lump sum of US $ 35,225 Lump sum charges quoted above are inclusive of one (1) ticket Vienna GujaratVienna, hotel accommodation, local transaction for Proner engineer. (5.4) Site supervision and other services
on site : For extension of site supervision of installation, commissioning and start-up period, in addition to 30
days as stated in para 5.3 above, the following cost on per man-day (tentatively 10 hours basis) is included in
the total cost @ US $ 850.00 per man-day for 10 days. However, the payment shall be made as per actuals."

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5. In respect of the BEDP part of the work, Proner raised invoices dt. 15th Feb., 2001, 5th June, 2001 and
26th Sept., 2001 for US $ 94,080; 58,800 and 58,800, respectively. IOC before making payment on the three
invoices set out above applied to the AO under s. 195(2) of the Act to make payment without TDS. The case
of IOC was that the services rendered by Proner for preparation of basic engineering with related know-how
package are in the nature of technical services. The entire basic engineering and related know-how package is
prepared by Proner in Austria. As per the tax treaty between India and Austria, art. 7 the payment made by
IOC to Proner in respect of BEDP was fees for technical services. Article 7 of the treaty is as follows :
"Amount paid by an enterprise of one of the territories for technical services furnished by an enterprise of the
other territory shall not be subject to tax by the first mentioned territory except insofar as such amounts are
attributable to activities actually performed in the first mentioned territory. In computing the income so
subject to tax, there shall be allowed as deductions the expenses incurred in the first mentioned territory in
connection with the activities performed in that territory." IOC, therefore, submitted that only fees for
technical services attributable to services performed in India are taxable in India. Such fees are taxable on net
basis i.e., after deducting expenditure in respect of the same. Since, the entire services for preparation of basic
engineering and related know-how package were performed outside India as per Art. 7 of the tax treaty, the
payment for such services is not liable to tax in India. IOC, therefore, requested for issue of an authorization
for remittance to Proner without TDS.

6. The Dy. CIT, TDS Circle 1(1), Mumbai was of the view that Proner under the agreement allowed IOC to
use Biturox process and, therefore, the payment in question was for use of process in India and, therefore, was
royalty according to the Indo-Austrian treaty. Therefore, under art. 6 of the Indo-Austrian treaty, the same
was taxable in India. Article 6 of the treaty is as follows : "Royalty derived by a resident of one of the
territories from sources in the other territory may be taxed only in that other territory. In this article, the term
royalty means any royalty or other like amount received as consideration for the right to use copyrights,
artistic or scientific work, cinematographic films, patents, models, designs, plans, secret process or formulae,
trademarks and other like property or rights." The Dy. CIT, TDS Circle 1(1), Mumbai, accordingly, directed
IOC to deduct tax at 20 per cent before making remittances to Proner. The said three orders arising out of
rejection of the three applications of IOC under s. 195(2) of the Act, were confirmed by the learned CIT(A)
giving rise to these three appeals by IOC before the Tribunal.
We have heard the submissions of the learned counsel for the assessee, who reiterated the stand as taken
before the Revenue authorities. The learned Departmental Representative relied on the order of learned
CIT(A).
We have considered the rival submissions. The term technical service has not been defined in the treaty.
Article 2(2) of the treaty provides that words not defined in the treaty have the meaning which such term has

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under the laws in force in that territory relating to the taxes which are the subject of the treaty. Therefore, the
definition of technical services as given in Expln. 2 below s. 9(1)(vii) of the IT Act, 1961 will be relevant.
Explanation 2 to s. 9(1)(vii) reads as follows : "Explanation 2For the purposes of this clause, fees for
technical services means any consideration (including any lump sum consideration) for the rendering of any
managerial, technical or consultancy services (including the provision of services of technical or other
personnel) but does not include consideration for any construction, assembly, mining or like project
undertaken by the recipient or consideration which would be income of the recipient chargeable under the
head salaries." Sec. 3 of the technical section of the agreement between IOC and Proner gives details of
BEDP. A perusal of these terms shows that it consists of various drawings, designs etc. These have already
been given in para 3 of this order. Based on these documents, IOC was to set up its plant. IOC was to set up
the plant by using these drawings through its own work force. Proner was only to supervise such installation
and was to commission and start the plant. The taxability of consideration relating to these services are not in
dispute in this appeal. In these appeals, we are concerned only with the payments for BEDP. BEDP package
is nothing but a know-how supplied along with a license to use the know-how by IOC without any limitation
for its own use. IOC does not have any other right. In order that a payment be qualified as royalty under art.
6(2) of the Indo-Austrian treaty, it has to be in the nature of royalty or like royalty and such royalty is paid
towards right to use copyrights, artistic or scientific works, cinematographic films, patents, models, designs,
plans, secret processes or formulae, trademarks and other like property or rights. The impugned payment
towards the supply of basic and engineering package and is not towards the use of some property nonetheless
it is for creating asset in the shape of plant that will be designed, constructed and operated as per the technical
know-how supplied by Proner. The Authority of Advance Ruling in the case of Advance Ruling P. No. 30 of
1999, ABC, In re (1999) 154 CTR (AAR) 246 : (1999) 238 ITR 296 (AAR) making reference to the Dr.
Vogels Commentary held at p. 308 as under : "It would appear that there are three main ingredients which
partake of the character of royalty payment It is the payment made in return for a right to exercise a
beneficial privilege or right. The payment is made to the person who owns the right. The consideration
payable is determined on the basis of amount of use."

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In the present case, the amount paid by IOC is for creating asset in the shape of plant. The consideration is for
passing of information concerning the design of plant which is tailor-made to meet the requirements of a
buyer. Proner has granted the right to use the Biturox process, which is embedded in the plant to be set up
based on basic design engineering package and not the right to use the license. The consideration is not based
on the amount of use. Applying the principles laid down by AAR in the above case, the impugned (amount)
cannot be held in the nature of royalty.

9. Alternative plea of the assessee is that the design of the Biturox process at most constitutes plant and sale
thereof amounts to sale of goods. The income from sale of goods is a business income and same will be
taxable only if Proner has a PE in India. In this regard, the assessee placed reliance on the decision in the case
of Modern Threads (India) Ltd. vs. Dy. CIT (1999) 63 TTJ (Jp)(TM) 601 : (1999) 69 ITD 115 (Jp)(TM). The
facts in the aforesaid case was that Technimont S.P.A., an Italian company sub-licensed to the assessee
company right to use the process for manufacturing of PTA. The contract provided for supply to technical
know-how and basic process engineering documentation for the design, construction and operation of the
plant. The issue for consideration was whether the amount paid towards supply of technical know-how and
basic process engineering documentation could be regarded as royalty. The Tribunal held that payment
towards supply of technical know-how and basic process engineering documentation relates not to use of any
process, secret formula or patent for production of any commodity but for creating an asset in the shape of a
plant designed, constructed and operated as per the technical know-how developed by the licensor and basic
process engineering documentation provided by the sub-licensor and, therefore, is in the nature of business
income.
10. We are of the view that these precedents support the plea of the assessee that the payment in question
cannot be said to be royalty. It is technical fee or business profit, it is not chargeable to tax in India unless the
fee is paid for services rendered in India or if Proner has a PE in India. It is not the case of the Revenue
authorities that the services were rendered in India or Proner has a PE in India. We, therefore, hold that the
payment by IOC to Proner is not in the nature of royalty and, therefore, the same was not chargeable to tax in

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the hands of Proner under the IT Act, 1961 in the light of the Indo-Austrian treaty. Consequently, there was
no obligation on the part of IOC to deduct tax at source. The appeals are allowed.

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