2006 (2) TMI 648 - AT - Income Tax

Liability to deduct tax - Payment for Liaison with legal and financial advisors - Non-resident - Royalty Or fee for technical service - HELD THAT - It is clear that such payment is purely for services. Since payment for technical services is not covered under DTAA, hence no TDS is required as provisions of DTAA will prevail as per decision of Supreme Court in the case of Union of India v. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT . Such payments in no way can be considered as royalty as for rendering such service one is not imparting information concerning technical, industrial, commercial or scientific knowledge, experience or skill. We are not in a position to decide the issue in absence of details of information as received by the appellant, whether information provided is secret based on experience or skill ? Another aspect which is to be considered as to whether the consideration paid is for information which is of perpetual or extended use. If the non-resident company is providing support on the basis of facts and information collected by appellant and thereby suggesting ways and means with the aim of providing support to develop specified areas relevant to marketing and financial areas, then - consideration paid may not be termed as royalty. Hence on the deduction of tax at source in respect of payment for following item the matter Is restored back on the file of learned ITO (TDS). In the result the appeal is treated as partly allowed.

Issues Involved:
1. Classification of payments made to non-resident companies as either royalty or fees for technical services.
2. Applicability of tax deduction at source (TDS) on such payments under the Indo-Mauritius treaty and Indian Income-tax Act.
3. Interpretation of "know-how" and its implications on the nature of payments.

Detailed Analysis:

1. Classification of Payments:
The appellant contended that payments made to non-resident companies were for advisory and support services, not for royalty or fees for technical services. The payments were categorized under two heads:
(a) Provision of expertise and training on technological aspects.
(b) Provision of advisory and support services on operational and financial aspects.

The appellant deducted TDS for category (a) but not for category (b), arguing that the Indo-Mauritius treaty does not cover technical services and that services performed outside India are not liable for TDS as per Circular No. 23 and Circular No. 786.

The Assessing Officer classified the payments as technical services under section 9(1)(vii) of the Income-tax Act, holding them taxable in India. The CIT(A) upheld this view, stating that the payments represented fees for technical services and royalty as defined in the agreement and the DTAA.

2. Applicability of TDS:
The appellant argued that payments for services are distinct from payments for know-how and intellectual property rights. They contended that business and professional income of a non-resident company is taxable in India only if it has a permanent establishment or a fixed base in India. Payments for services rendered are not royalties unless they are ancillary to enabling relevant technology or know-how to be transferred or used. The appellant cited various case laws to support their argument that the payments in question were for routine services and not for technical services or royalties.

The CIT(A) and the Assessing Officer, however, held that the payments were for imparting information concerning technical, industrial, commercial, or scientific knowledge, experience, and skill, thus classifying them as royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA.

3. Interpretation of "Know-how":
The appellant argued that the definition of know-how in the agreement cannot be equated with the legal definition of know-how. They cited the Supreme Court's observation that the substance of the payment should be considered rather than the labels attached by the parties. The appellant contended that the payments were for services of a routine nature and not for imparting secret or specialized knowledge.

The Tribunal examined the nature of the payments and distinguished between contracts for know-how and contracts for provision of services. They noted that the Assessing Officer relied only on the description in the invoices without obtaining the gist of the actual advice and assistance provided. The Tribunal held that the payment for liaison with legal and financial advisors was purely for services and not for royalty or technical services. However, for the remaining items related to continuous support in developing sales and marketing strategies, the Tribunal restored the matter to the ITO (TDS) for further examination to determine if the payments were for secret information based on experience or skill.

Conclusion:
The Tribunal partly allowed the appeal, holding that no tax was required to be deducted at source for payments related to liaison with legal and financial advisors. For payments related to continuous support in developing sales and marketing strategies, the matter was remanded to the ITO (TDS) for further examination. The decision emphasized the need to ascertain the character of payments based on the substance of the services provided rather than the labels used in the agreement.

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