2017 (3) TMI 1514 - AT - Income Tax

TDS u/s 195 - professional fees paid to Mahta Partners, LLC USA a non resident - Royalty payment - DTAA - PE in India - Held that - The payments made by the assessee are for rendition of these services and not for use of any information concerning industrial, commercial or scientific information . While characterizing nature of payment what is to be seen is the activity triggering in consideration of which the payment is made. That activity, in the present case, is rendition of services. The fact that in the process of availing these services, the assessee benefits from rich experience of the service provider is wholly irrelevant in the present context. The payment is for rendition of services and not for right to use any information concerning industrial, commercial or scientific experience, in possession of the service provider. In this view of the matter, the authorities below were clearly in error in holding that the impugned payment was covered by the definition of royalty under article 12(3)(a). Coming to the taxability of impugned fees as fees for included services under article 12.4, it is only elementary that such on standalone basis a taxability can arise only when these services make available technical knowledge, experience, skill, Know-how or process etc, in the sense that recipient of services is enabled to perform such services, in future, on his own and without any recourse to service provider. It is not, however, the case of the revenue and rightly so, that such a condition is satisfied on the facts of the present case. Learned Departmental Representative fairly accepts that it is not even the case of the authorities below that make available clause is satisfied. Thus we uphold the grievance of the assessee. The impugned demand raised under Section 201 r.w.s. 195, accordingly, stand quashed. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of professional fees as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961.
2. Requirement of Tax Deduction at Source (TDS) under Section 195 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of Professional Fees as 'Royalty':
The primary issue revolves around whether the professional fees paid to Mehta Partners, LLC, USA, for strategic counseling and advisory services should be classified as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12(3)(a) of the India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer argued that the services rendered were covered by the definition of royalty, as they involved parting with information concerning industrial, commercial, or scientific experience. This view was upheld by the CIT(A), who stated that the information provided by MPL had proprietary knowledge and intellectual value, thus qualifying as royalty. However, the Tribunal disagreed, stating that the payments were for the rendition of services and not for the use of any information concerning industrial, commercial, or scientific experience. The Tribunal emphasized that the nature of the payment should be determined by the activity triggering the payment, which in this case, was the provision of services, not the transfer of information.

2. Requirement of Tax Deduction at Source (TDS) under Section 195:
The second issue pertains to whether the payment to Mehta Partners, LLC required TDS under Section 195. The Assessing Officer contended that since the payment was classified as royalty, it was taxable in India, and thus TDS should have been deducted. The CIT(A) supported this view, stating that the payment was taxable as 'Royalties' under both the Income-tax Act and the DTAA, making the appellant an 'assessee in default' for not deducting TDS. However, the Tribunal found that the services did not 'make available' technical knowledge, experience, skill, know-how, or processes to the recipient, a necessary condition for fees to be considered as 'included services' under Article 12.4 of the DTAA. The Tribunal noted that the authorities did not argue that the 'make available' clause was satisfied. Consequently, the Tribunal held that the payment was not taxable as royalty or fees for included services, and thus, there was no requirement for TDS under Section 195.

Conclusion:
The Tribunal concluded that the professional fees paid to Mehta Partners, LLC were for the provision of services and not for the use of information, and hence did not qualify as 'Royalty' under Section 9(1)(vi) or the DTAA. Additionally, the services did not meet the 'make available' criterion for 'fees for included services' under the DTAA. Therefore, the demand raised under Section 201 r.w.s. 195 was quashed, and the appeal was allowed.