We bought engineering drawings and designs outright from a US company for our plant. The buyer withheld tax treating it as royalty. Was that right?
No. The Authority ruled that the amount Pro-Quip Corporation received from Linde Process Technologies India Ltd for the sale of engineering drawings and designs was not taxable in India. The purchase order transferred ownership in the drawings outright, with no reservation of rights, no contingency and no continuing service obligation. That is a sale of property, not consideration for the use of or the right to use property, so article 12 of the India-US convention on royalties and fees for included services was not attracted. Any services attached to the sale fell within the exclusion in article 12(5). The applicant could claim a refund of the tax deducted, with interest. The ruling binds only Pro-Quip.
Pronounced by the Authority for Advance Rulings (Suhas C. Sen, J. (Chairman) and Mohini Bhussry, Member) on 2001-08-29. It bears on section 9(1)(vi), section 195, section 32, section DTAA art 12 of the Income Tax Act 1961, in Residence & Treaty Benefit and TDS Defaults matters.
This is the standard AAR citation for the line between selling a design and licensing know-how. The test the Authority applied is ownership: ask whether the transferor kept anything back. Where the drawings pass outright, with no restriction on use, no reversion and no linked service obligation, there is nothing left for the transferor to permit the use of, and the royalty article has nothing to bite on. The second half is equally useful - services ancillary and subsidiary to the sale of property fall inside the exclusionary clause of article 12(5) and cannot be picked off separately as fees for included services. Note that the reasoning rests on the treaty. Domestic law has since moved, and the Supreme Court has held that a retrospective widening of section 9(1)(vi) cannot rewrite a treaty definition.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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Pro-Quip Corporation, a company incorporated in Oklahoma in the United States, sold engineering drawings and designs to Linde Process Technologies India Ltd for a hydrogen generation plant project, under purchase order No. 19004 dated 11 December 1998. The total value of the purchase order was USD 577,500. Linde initially deducted tax at 15 per cent on a remittance of USD 259,875, but afterwards obtained a no-objection certificate from the Indian tax authorities permitting remittance without deduction. The applicant put two questions to the Authority: whether it was liable to tax on the amounts received from Linde for the sale of the engineering drawings and designs under that purchase order; and whether it was entitled to a refund of the tax deducted at source, amounting with interest for delayed payment to Rs 17,10,525. The transaction was an outright purchase - the drawings passed to the buyer without any clause reserving rights to the seller or making the transfer contingent, and without a continuing obligation to provide services.
The Authority answered the first question in the negative and in the applicant's favour. The transaction was an outright sale of property, not the grant of a right to use it, and the payment could not be treated as royalty at all. Article 12 of the India-US convention taxes consideration for the use of, or the right to use, the categories of property it lists; where ownership passes unconditionally there is no such use to pay for. Nor could the receipt be brought in as fees for included services: any services connected with the transaction were ancillary and subsidiary to the sale of property and fell squarely within the exclusionary clause in paragraph 5 of article 12. The applicant would therefore not be liable to pay any tax in India on the amounts received under the purchase order. On the second question, the Authority held that the applicant was entitled to claim a refund of the tax deducted at source, together with interest, by following the procedure prescribed in Chapter XVII of the Act.
The Authority separated three things that are commonly run together: a royalty, a fee for included services, and the price of a thing sold. A royalty under article 12 presupposes that the owner retains the property and permits another to use it - the words are 'use of' or 'right to use'. That structure cannot survive an unconditional transfer of ownership. The Authority looked for the marks of a licence in the purchase order and found none: no clause limiting what the buyer might do with the drawings, no contingency on which the transfer depended, no reversion, no long-term service obligation binding the seller. What passed was the property itself, and the consideration was its price. The Revenue's alternative case, that the drawings came with technical services and so the payment was a fee for included services, was met on the treaty's own wording: paragraph 5 of article 12 takes out of the definition services that are ancillary and subsidiary to the sale of property, and services incidental to handing over drawings are the paradigm case. Having found no charge, the Authority dealt with the practical consequence. Tax had been deducted at 15 per cent on part of the remittance before the no-objection certificate issued. Since nothing was chargeable, the deduction was of tax not due, and the applicant's remedy was the ordinary refund machinery in Chapter XVII, with interest.
This is a case of out and out sale of property. The payment cannot be treated as royalty at all.
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Handle my notice → Ask a CA on WhatsAppNo. The Authority ruled that the amount Pro-Quip Corporation received from Linde Process Technologies India Ltd for the sale of engineering drawings and designs was not taxable in India. The purchase order transferred ownership in the drawings outright, with no reservation of rights, no contingency and no continuing service obligation. That is a sale of property, not consideration for the use of or the right to use property, so article 12 of the India-US convention on royalties and fees for included services was not attracted. Any services attached to the sale fell within the exclusion in article 12(5). The applicant could claim a refund of the tax deducted, with interest. The ruling binds only Pro-Quip. This was decided by the Advance Ruling (Suhas C. Sen, J. (Chairman) and Mohini Bhussry, Member) and bears on section 9(1)(vi), section 195, section 32, section DTAA art 12 of the Income Tax Act 1961. This is the standard AAR citation for the line between selling a design and licensing know-how. The test the Authority applied is ownership: ask whether the transferor kept anything back. Where the drawings pass outright, with no restriction on use, no reversion and no linked service obligation, there is nothing left for the transferor to permit the use of, and the royalty article has nothing to bite on. The second half is equally useful - services ancillary and subsidiary to the sale of property fall inside the exclusionary clause of article 12(5) and cannot be picked off separately as fees for included services. Note that the reasoning rests on the treaty. Domestic law has since moved, and the Supreme Court has held that a retrospective widening of section 9(1)(vi) cannot rewrite a treaty definition. If it applies to you, the first step is this: Draft the purchase order so that ownership passes and nothing is reserved - no restriction on use, no reversion, no linked service obligation.
Pro-Quip Corporation, a company incorporated in Oklahoma in the United States, sold engineering drawings and designs to Linde Process Technologies India Ltd for a hydrogen generation plant project, under purchase order No. 19004 dated 11 December 1998. The total value of the purchase order was USD 577,500. Linde initially deducted tax at 15 per cent on a remittance of USD 259,875, but afterwards obtained a no-objection certificate from the Indian tax authorities permitting remittance without deduction. The applicant put two questions to the Authority: whether it was liable to tax on the amounts received from Linde for the sale of the engineering drawings and designs under that purchase order; and whether it was entitled to a refund of the tax deducted at source, amounting with interest for delayed payment to Rs 17,10,525. The transaction was an outright purchase - the drawings passed to the buyer without any clause reserving rights to the seller or making the transfer contingent, and without a continuing obligation to provide services. The matter was decided on 2001-08-29 by the Advance Ruling (Suhas C. Sen, J. (Chairman) and Mohini Bhussry, Member). On those facts the Advance Ruling held as follows. The Authority answered the first question in the negative and in the applicant's favour. The transaction was an outright sale of property, not the grant of a right to use it, and the payment could not be treated as royalty at all. Article 12 of the India-US convention taxes consideration for the use of, or the right to use, the categories of property it lists; where ownership passes unconditionally there is no such use to pay for. Nor could the receipt be brought in as fees for included services: any services connected with the transaction were ancillary and subsidiary to the sale of property and fell squarely within the exclusionary clause in paragraph 5 of article 12. The applicant would therefore not be liable to pay any tax in India on the amounts received under the purchase order. On the second question, the Authority held that the applicant was entitled to claim a refund of the tax deducted at source, together with interest, by following the procedure prescribed in Chapter XVII of the Act.
The Authority separated three things that are commonly run together: a royalty, a fee for included services, and the price of a thing sold. A royalty under article 12 presupposes that the owner retains the property and permits another to use it - the words are 'use of' or 'right to use'. That structure cannot survive an unconditional transfer of ownership. The Authority looked for the marks of a licence in the purchase order and found none: no clause limiting what the buyer might do with the drawings, no contingency on which the transfer depended, no reversion, no long-term service obligation binding the seller. What passed was the property itself, and the consideration was its price. The Revenue's alternative case, that the drawings came with technical services and so the payment was a fee for included services, was met on the treaty's own wording: paragraph 5 of article 12 takes out of the definition services that are ancillary and subsidiary to the sale of property, and services incidental to handing over drawings are the paradigm case. Having found no charge, the Authority dealt with the practical consequence. Tax had been deducted at 15 per cent on part of the remittance before the no-objection certificate issued. Since nothing was chargeable, the deduction was of tax not due, and the applicant's remedy was the ordinary refund machinery in Chapter XVII, with interest. In the words reproduced by the source cited on this page: "This is a case of out and out sale of property. The payment cannot be treated as royalty at all."
It was decided by the Advance Ruling on 2001-08-29. Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 9(1)(vi), section 195, section 32, section DTAA art 12, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Authority answered the first question in the negative and in the applicant's favour. The transaction was an outright sale of property, not the grant of a right to use it, and the payment could not be treated as royalty at all. Article 12 of the India-US convention taxes consideration for the use of, or the right to use, the categories of property it lists; where ownership passes unconditionally there is no such use to pay for. Nor could the receipt be brought in as fees for included services: any services connected with the transaction were ancillary and subsidiary to the sale of property and fell squarely within the exclusionary clause in paragraph 5 of article 12. The applicant would therefore not be liable to pay any tax in India on the amounts received under the purchase order. On the second question, the Authority held that the applicant was entitled to claim a refund of the tax deducted at source, together with interest, by following the procedure prescribed in Chapter XVII of the Act. It arises in Residence & Treaty Benefit and TDS Defaults matters, on section 9(1)(vi), section 195, section 32, section DTAA art 12 of the Income Tax Act 1961, and was decided by Suhas C. Sen, J. (Chairman) and Mohini Bhussry, Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If services are supplied with the drawings, show they are ancillary and subsidiary to the sale so the exclusion in the royalties article applies. Where tax has already been withheld on a non-taxable payment, claim the refund with interest under Chapter XVII rather than arguing about it in assessment. Argue the treaty definition of royalty on its own terms; Explanations 4 to 6 to section 9(1)(vi) do not change it.
Still good law. Checked the position on the treaty limb the ruling rests on. The Finance Act 2012 inserted Explanations 4 to 6 to section 9(1)(vi) with retrospective effect, widening royalty in domestic law. The Delhi High Court in DIT v. New Skies Satellite BV (8 February 2016) held that no amendment to the Act, retrospective or prospective, can extend to the terms of an international treaty, and the Supreme Court in Engineering Analysis Centre of Excellence v. CIT (2 March 2021) applied the same principle in holding that the treaty definition of royalty governs where it is more beneficial. So the article 12 analysis in this ruling has not been displaced. What a reader must not do is transplant it into a domestic-law-only case, where the amended section 9(1)(vi) applies. No High Court or Supreme Court decision dealing with this ruling itself was found. The Authority itself was replaced by the Board for Advance Rulings from 1 September 2021 (Finance Act 2021; Notification 96/2021), whose rulings are appealable to the High Court under section 245W, and the Income-tax Act 1961 was replaced by the Income-tax Act 2025 from 1 April 2026. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
No ITR citation appears in the Indian Kanoon text, so the reported field is left blank. The Authority's reference to two earlier decisions on the meaning of plant and machinery could not be checked against their own texts. Whether the applicant in fact recovered the refund is outside the ruling. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority answered the first question in the negative and in the applicant's favour. The transaction was an outright sale of property, not the grant of a right to use it, and the payment could not be treated as royalty at all. Article 12 of the India-US convention taxes consideration for the use of, or the right to use, the categories of property it lists; where ownership passes unconditionally there is no such use to pay for. Nor could the receipt be brought in as fees for included services: any services connected with the transaction were ancillary and subsidiary to the sale of property and fell squarely within the exclusionary clause in paragraph 5 of article 12. The applicant would therefore not be liable to pay any tax in India on the amounts received under the purchase order. On the second question, the Authority held that the applicant was entitled to claim a refund of the tax deducted at source, together with interest, by following the procedure prescribed in Chapter XVII of the Act.
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