2022 (8) TMI 296 - AT - Income Tax

TDS u/s 195 - taxability of the receipts of University of Texas, USA, under India-USA DTAA - 10% TDS on gross payments made to University of Texas at Austin, USA (Non-Residents) - whether the services rendered by non-resident University of Texas at Austin, USA to carry out research programme for development of suitable chemical Enhanced Oil Recovery (EOR) formulations in collaboration with the assessee is covered under royalties/fees for technical services or not? - HELD THAT - The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilizes for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used - unless the service provider makes available his technical knowledge, experience, skill, know-how or process to the recipient of the technical service, in view of the clauses in the DTAA, the liability to tax is not attracted. It is clear that test is whether the recipient of the service is equipped to carry on his business without reference to the service provider. If he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available. We have referred the agreement between the assessee and University of Texas at Austin, USA, defining the scope of work and note that there was neither any patent/copyright used by the assessee against which the royalty was paid nor there was any technical know-how which was made available to the assessee. Thus in such facts and circumstances there is no liability on the assessee to deduct the TDS in pursuance to the Article 12 of India-USA DTAA. There remains no ambiguity to the fact that there was any royalty payment made by the assessee or any technical know-how was received by the assessee. Accordingly, we set aside the finding of the Ld. CIT-A and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Non-taxability of receipts under India-USA DTAA.
2. Taxability of receipts under section 44BB of the Income-tax Act, 1961.
3. Determination of TDS on payments made to the University of Texas at Austin, USA.

Issue-wise Detailed Analysis:

1. Non-taxability of Receipts under India-USA DTAA:
The primary issue raised by the assessee was the non-taxability of receipts of the University of Texas, USA, under the India-USA Double Taxation Avoidance Agreement (DTAA). The assessee contended that the payments made for research activities did not qualify as "royalties" or "fees for included services" under Article 12 of the DTAA. The argument was based on the premise that there was no transfer of technology or intellectual property rights, and hence, the "make available" clause was not satisfied.

The CIT-A, however, held that the services rendered by the University of Texas involved the transfer of technical knowledge and patents, thereby making the technology available to the assessee. This was supported by the Memorandum of Understanding (MoU) between India and the USA, which clarified that services related to the exploration or exploitation of mineral oil or natural gas are considered as making technology available. Consequently, the CIT-A upheld the AO's decision to tax the payments as royalties/fees for technical services.

2. Taxability of Receipts under Section 44BB of the Income-tax Act, 1961:
The assessee alternatively argued that even if the receipts were taxable, they should be taxed under section 44BB of the Income-tax Act, which deals with the taxation of non-residents involved in the business of providing services or facilities in connection with the extraction or production of mineral oils. The assessee contended that the payments were directly connected with the extraction and production of mineral oil, and hence, should be taxed under section 44BB.

The CIT-A, however, disregarded this contention, stating that the payments were for technical services and not for mining or related projects, and thus did not fall under section 44BB. The CIT-A maintained that the payments were taxable as royalties/fees for technical services under the DTAA.

3. Determination of TDS on Payments Made to the University of Texas at Austin, USA:
The AO directed the assessee to deduct TDS at 10% on the gross payments made to the University of Texas, considering them as royalties/fees for technical services. The assessee challenged this direction, arguing that the payments were not subject to TDS under section 195 of the Act in light of the India-USA DTAA provisions.

Upon appeal, the ITAT examined whether the services rendered by the University of Texas involved the transfer of technical knowledge or intellectual property. The ITAT concluded that the services provided were purely technical in nature and did not involve the transfer of any technical knowledge or intellectual property that would enable the assessee to apply the technology independently. Therefore, the payments did not qualify as royalties/fees for technical services under Article 12 of the DTAA.

The ITAT set aside the CIT-A's findings and directed the AO to delete the addition, holding that the assessee was not liable to deduct TDS on the payments made to the University of Texas.

Judgment Summary:
The ITAT allowed both appeals filed by the assessee, concluding that the payments made to the University of Texas were not taxable as royalties/fees for technical services under the India-USA DTAA. Consequently, the assessee was not liable to deduct TDS on these payments. The findings in ITA No. 1881/Ahd/2019 were applied to ITA No. 1882/Ahd/2019, resulting in both appeals being decided in favor of the assessee.