Big Win for UAE Assessee: ITAT Holds Design Fees Not Taxable as “Royalty” Under India-UAE DTAA

The ITAT ruled that the payment received by the taxpayer for bridge design services should be taxed in India as “royalty” under the provisions of the Act and the India-UAE Double Taxation Avoidance Agreement (DTAA)

International Bridge Technologies Middle East DMCC has filed an appeal in the Income Tax Appellate Tribunal (ITAT) Bench “D” in Delhi, challenging an Assessment Order dated January 27, 2025, passed by the tax authorities under Section 147/144C(13) of the Income Tax Act, 1961. The case pertains to the Assessment Year 2018-19.

The assessee is a tax resident of the United Arab Emirates (UAE), engaged in providing design and consultancy services. On December 22, 2017, the assessee entered into a Sub-Consultancy Agreement with Systra MVA Consulting (India) P. Ltd. for providing consultancy services concerning the Versova-Bandra Sea Link Project. Under the said agreement, the assessee prepared drawings, reports, and technical designs and also received professional fees amounting to Rs 2.10 crore from Systra India. The assessee did not pay any tax in India on this amount, claiming the amount is not chargeable to tax in India, as it does not possess any Permanent Establishment (PE) in India. The department does not dispute this claim of the assessee.

However, during the Draft Assessment proceedings of the case, the Assessing Officer (AO) claimed that the professional fee received by the assessee during the year in consideration is liable to be taxed in India as “royalty” under section 9(1)(vi) of the Act as well as under provisions of the Double Taxation Avoidance Agreement (DTAA) and confirmed the decision vide a Draft Assessment Order dated March 24, 2024.

When the tribunal analysed the facts of the case, it noted that all designs, drawings, and deliverables were fully transferred to Systra India, including ownership rights. It further flagged the difference between payments for “use of a design” (which can be a royalty) and payments for “outright sale of a design” (which are not royalties).

The tribunal cited earlier judicial decisions based on similar issues and held that the designs were project-specific and transferred entirely to the client. Therefore, the payment was for services and the sale of designs, not for the right to use intellectual property. In conclusion, the tribunal held that the payment received by the assessee is not taxable in India as “royalty” under the DTAA. Allowed the assessee’s appeal.