2021 (4) TMI 674 - AT - Income Tax

TDS u/s 195 - payment made to Georgia Tech Research Corporation towards cost reimbursement for joint Research Projects as Royalty - DTAA between India and USA - levy of interest u/s. 201(1A) - HELD THAT - As perused the copy of agreement executed on 23rd July 2010 between the assessee and Georgia Tech Research Corporation placed in the paper book for disclosing information by the assessee and GSRTC collectively for the purpose of joint research pertaining to tight gas sandstone and reservoirs. It is a joint research project and both the parties have right on result of research project. Each party shall use the proprietary information only for and to the extent required to accomplish the purpose of the agreement. Explanation to section 9(1)(vi) which defines royalty. AO has not ascertained the true characters of the transactions. The assessee has explained with the support of agreement and copies of invoices that payment made was towards cost reimbursement of joint research project and does not amount to royalty as per section 9(1)(vi) and not covered with clause 3 of Article 12 as royalties and fees for included services of India USA DTAA. The assessee has demonstrated from the copies of agreement and copies of invoices that the payments to GTRC was not in the nature of royalties but was in the nature of cost reimbursement for a joint research project on which both the parties have equal right to use. AO has not specifically considered the relevant clauses of the agreement of joint research to be carried out for the subject matter from sharing of information from both the parties. We have also gone through the decision of Hon ble High Court of Calcutta in the case of Dunlop Rubber Company Ltd. 1982 (2) TMI 24 - CALCUTTA HIGH COURT holding that the result of the research was for the benefit of all concerned including the head office and subsidiary concern. But the very fact that technical data was jointly obtained and the expenses were shared together indicates that it could not be treated as income. The assessee agreed for reimbursement of cost incurred by the GTRC for doing research activity as a part of joint research on which both the parties have equal right on result of such joint research project - AO has not carried out any verification/investigation to disprove the claim of pure reimbursement of expenses made by the assessee on the basis of relevant supporting material as reflected in this order. CIT(A) has also not specifically controverted the related material referred by the assessee as clauses of agreement pointing out that payment was made to GTRC towards cost reimbursement for joint research project and not for any royalty - not established by the authorities below that the agreement grant the assessee the right to use the GTRC s intellectual property in exchange for royalty payments. Thus AO failed to prove that payment made by the assessee to GTRC was of the nature of royalty payment. Therefore this ground of appeal of the assessee is allowed. Since we have allowed the ground of appeal of the assessee that payment made to GTRC was towards cost reimbursement for joint research project and not royalty therefore levy of interest u/s. 201(1A) is also not justified. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the payments made by the assessee to Georgia Tech Research Corporation (GTRC) are in the nature of "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and USA.
2. Whether the assessee is liable to deduct tax at source (TDS) under Section 195 of the Income Tax Act on such payments.
3. Whether the levy of interest under Section 201(1A) of the Income Tax Act is justified.

Issue-wise Detailed Analysis:

1. Nature of Payments as Royalty:
The main issue revolves around whether the payments made by the assessee to GTRC for a collaborative joint research project should be classified as "royalty." The Assessing Officer (AO) contended that the payments were for the use of proprietary information and thus fell under the definition of royalty as per Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and USA. The AO cited that the payments were for developing proprietary information by GTRC and allowing the assessee to access it, which constituted royalty. However, the assessee argued that the payments were merely cost reimbursements for a joint research project and not for acquiring any intellectual property rights.

The Tribunal examined the agreement between the assessee and GTRC, noting that it was a joint research project where both parties had equal rights to the research results. The Tribunal found that the payments were for cost reimbursement and not for royalty, as there was no transfer of rights or use of intellectual property as defined under Section 9(1)(vi) and Article 12 of the DTAA.

2. Liability to Deduct Tax at Source (TDS):
The AO had issued a notice to the assessee stating that the payments to GTRC were liable for TDS under Section 195, considering them as royalty. The assessee contested this, arguing that the payments were not for royalty but for cost reimbursement. The Tribunal agreed with the assessee, stating that the payments were not in the nature of royalty and thus not subject to TDS under Section 195. The Tribunal emphasized that the AO did not correctly ascertain the nature of the transactions and failed to prove that the payments were royalty.

3. Levy of Interest under Section 201(1A):
Since the Tribunal concluded that the payments were not royalty and thus not subject to TDS under Section 195, the levy of interest under Section 201(1A) was also deemed unjustified. The Tribunal allowed the assessee's appeal on this ground as well, stating that the interest levy was not warranted given the nature of the payments.

Conclusion:
The Tribunal allowed both appeals filed by the assessee for the assessment years 2012-13 and 2013-14. It held that the payments made to GTRC were for cost reimbursement of a joint research project and not for royalty. Consequently, the assessee was not liable to deduct TDS under Section 195, and the levy of interest under Section 201(1A) was not justified. The Tribunal's decision was based on a thorough examination of the agreement and supporting documents, which demonstrated that the payments were not in the nature of royalty.