2011 (8) TMI 295 - AT - Income Tax

Payment of royalty or business profit - Disallowance - Under section 40(a)(i) - whether the assessee indeed had an obligation to deduct tax at source from the remittance of Rs 11,71,826 to British Dental Health Association UK - Held that When an expression has been defined in law, and the impugned payment is not covered by such a specific definition, it cannot be open to us to look at normal connotations of this expression in business parlance. Simply because assessee is benefited by this accreditation, and the assessee uses the same for its marketing purposes, the character of payment cannot be classified as royalty . The expression royalty is neatly defined under Article 13(3) of Indo UK tax treaty, and unless the payment fits into the description set out in Article 13(3), it cannot be termed as royalty for the purposes of examining its taxability under the tax treaty - The impugned remittance is in the nature of business profits in the hands of the UK based recipient, and since the recipient admittedly did not have any permanent establishment in India, the same is not taxable in India - Therefore, the recipient did not have any primary tax liability in India, as a corollary thereto, the assessee did not have tax withholding obligations from this remittance - Decided in favour of assessee.

Summary

Issues:
Adjudication of disallowance under section 40(a)(i) of the Income Tax Act, 1961 regarding accreditation panel fees paid without tax deduction. Tax liability of the recipient in India for payments made abroad. Taxability of payments to a UK-based charitable institution under the India UK tax treaty.

Issue 1: Disallowance under section 40(a)(i) of the Income Tax Act, 1961
The appeal focused on the deletion of the disallowance of Rs 11,71,826 under section 40(a)(i) by the CIT(A). The Assessing Officer disallowed the amount as tax was not deducted at the source for payments made to a UK entity. The CIT(A) justified the deletion based on the non-taxable status of the recipient in India, leading to the conclusion that the disallowance was not sustainable in law. The ITAT upheld the CIT(A)'s decision citing the Supreme Court's ruling that tax withholding obligations arise only when the recipient is liable to tax in India. The ITAT emphasized that the payer's liability is vicarious and cannot be invoked without establishing the recipient's primary tax liability, which was not done by the Assessing Officer in this case.

Issue 2: Taxability of payments to a UK-based charitable institution under the India UK tax treaty
The second issue revolved around whether payments made to a UK-based charitable institution for accreditation panel fees were taxable in India under the India UK tax treaty. The ITAT examined the nature of the payments and concluded that the accreditation fees did not fall under the definition of 'royalties' as per the treaty. The ITAT highlighted that the recipient did not have a permanent establishment in India, making the income from accreditation fees not taxable in India as business profits under the treaty. The ITAT rejected the argument that the payments could be treated as royalties due to the marketing advantage derived from the accreditation, emphasizing that the specific definition of 'royalties' in the treaty must be met for taxability. Ultimately, the ITAT upheld the CIT(A)'s decision, ruling that the payments were not taxable in India under the India UK tax treaty.

In conclusion, the ITAT dismissed the appeal and upheld the decisions of the CIT(A) regarding the disallowance under section 40(a)(i) and the taxability of payments to a UK-based charitable institution under the India UK tax treaty. The judgment emphasized the importance of establishing the recipient's tax liability for tax withholding obligations and interpreting treaty provisions accurately to determine taxability in cross-border transactions.