2011 (9) TMI 208 - AT - Income Tax

Data processing charges - Amount payable outside India - withholding tax - Nature of payment - Royalties or Fees for Technical Services - Held that - payments made by the assessee to SPL is not royalty within the meaning of Article 12(3)(b) of the treaty. As the business profits are not taxable by virtue of DTAA - Decided in favor of assessee.

Summary

Issues Involved:
1. Taxability of data processing charges under the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.
2. Classification of payments as "Royalties" or "Fees for Technical Services" under Article 12 of the DTAA.
3. Obligation to withhold tax under Section 195 of the Income-tax Act, 1961.

Detailed Analysis:

1. Taxability of Data Processing Charges:
The appellant, a non-resident banking company, entered into an agreement with a Singapore-based company (SPL) for data processing services. The appellant contended that the payments made to SPL were not taxable in India as they were business profits not attributable to any Permanent Establishment (PE) in India under Article 7 of the DTAA. The CIT(A) upheld the AO's decision that the payments were taxable as royalties under Article 12(3)(a) of the DTAA and subject to withholding tax at 15%.

2. Classification of Payments:
The appellant argued that the payments were for business profits and not royalties or fees for technical services. The agreement specified that SPL would provide data processing support using its hardware and software in Singapore. The appellant used its application software to transmit raw data to SPL, which processed the data and transmitted the output back to the appellant. The Tribunal referred to its earlier decision in the appellant's own case, where it was held that such payments could not be considered royalties. The Tribunal noted that the appellant did not use or have the right to use any process or equipment belonging to SPL. The payment was for data processing services, not for the use of any process or equipment.

3. Obligation to Withhold Tax:
The Tribunal concluded that the payments made by the appellant to SPL were not royalties under Article 12(3)(a) or (b) of the DTAA. Since the payments were classified as business profits and SPL did not have a PE in India, the income was not taxable in India. Consequently, there was no obligation for the appellant to withhold tax under Section 195 of the Income-tax Act, 1961.

Conclusion:
The Tribunal allowed the appeals, holding that the payments made by the appellant to SPL were not royalties and were not taxable in India under the DTAA. Therefore, the appellant was not required to withhold tax on these payments.