2018 (9) TMI 62 - AT - Income Tax

TDS u/s 195 - remittance of USD 14,000 towards training fees to M/s Fair Isaac International Corpn. - India-USA Tax Treaty - P.E. in India - Held that - We find ourselves to be in agreement with the contention advanced by the ld. A.R that as the training services provided by M/s Fair Isaac International Corpn did not make available any technology etc. to the assessee, therefore, the same was not covered by the meaning of fees of included services as defined in the India USA tax treaty. Rather, we are of the considered view that rendering of the training services by M/s Fair Isaac International Corpn. would also assume the same character as that of the software license receipts, and as such would be in the nature of its business profits under Article 7 of the India USA tax treaty. However, as M/s Fair Isaac International Corpn. did not have a PE in India, therefore, the training fees received by it also could not be subjected to tax under Article 7 of the India-USA Tax Treaty. As the assessee was under no obligation to deduct tax at source under Sec. 195 of the Act in respect of the training fees remitted to M/s Fair Isaac International Corpn, therefore, it could not be held as being in default within the meaning of Sec. 201 of the Act for having failed to deduct tax at source while remitting the said amount - Decided in favour of assessee

Issues Involved:
1. Assessee in default for failure to withhold tax on payments to Fair Isaac Corporation.
2. Classification of payment to Fair Isaac as "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the India-USA DTAA.
3. Taxability of maintenance fees paid to Fair Isaac as "royalty" or "fees for technical services".
4. Taxability of training fees paid to Fair Isaac as "fees for technical services".
5. Grossing up of payment for computing withholding tax.
6. Charging of interest under Section 201(1A) for withholding tax.

Detailed Analysis:

1. Assessee in Default for Failure to Withhold Tax:
The assessee challenged the CIT(A)'s decision affirming the TDS Officer's order holding the assessee in default under Sections 201(1) and 201(1A) for not withholding tax on payments to Fair Isaac Corporation. The assessee argued that the payments were not subject to withholding tax under the Income Tax Act or the India-USA DTAA.

2. Classification of Payment to Fair Isaac as "Royalty":
The CIT(A) held that the payment of USD 100,000 to Fair Isaac was "royalty" under Section 9(1)(vi) and Article 12(3) of the India-USA DTAA, and thus liable to withholding tax under Section 195. The assessee contended that the payment was for a non-exclusive, non-transferable license to use software, not for the use of copyright, and thus not "royalty". The Tribunal agreed with the assessee, citing the Delhi High Court's decision in DIT Vs. Infrasoft Ltd., concluding that the payment did not constitute "royalty" and was not taxable in India.

3. Taxability of Maintenance Fees:
The CIT(A) held that the payment of USD 15,000 for maintenance fees was taxable as "royalty" and liable to withholding tax under Section 195. The assessee argued that the maintenance services did not "make available" technology and were thus not "fees for technical services" under the India-USA DTAA. The Tribunal agreed, stating that the maintenance fees were business profits under Article 7 of the DTAA and not taxable in India due to the absence of a PE of Fair Isaac in India.

4. Taxability of Training Fees:
The CIT(A) held that the payment of USD 14,000 for training fees was taxable as "fees for technical services" and liable to withholding tax under Section 195. The assessee contended that the training services did not "make available" technology and were not "fees for technical services" under the DTAA. The Tribunal concurred, noting that the training fees were business profits under Article 7 of the DTAA and not taxable in India due to the absence of a PE of Fair Isaac in India.

5. Grossing Up of Payment for Withholding Tax:
The CIT(A) confirmed the TDS Officer's action of grossing up the payment for computing withholding tax. The Tribunal's decision on the primary issues rendered this point moot as the payments were not subject to withholding tax.

6. Charging of Interest Under Section 201(1A):
The CIT(A) upheld the charging of interest under Section 201(1A) for the amount of withholding tax. The Tribunal's decision on the primary issues rendered this point moot as the payments were not subject to withholding tax.

Conclusion:
The Tribunal allowed the assessee's appeal, concluding that the payments to Fair Isaac Corporation were not taxable in India under the India-USA DTAA, and thus the assessee was not in default under Sections 201(1) and 201(1A) for not withholding tax. The Tribunal's decision was based on the interpretation of "royalty" and "fees for technical services" under the DTAA and the absence of a PE of Fair Isaac in India.

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