2023 (9) TMI 978 - AT - Income Tax

TDS u/s 195 - disallowance u/s 40(a)(i) on account of alleged non-deduction of tax at source by the assessee while making remittance to Symbiotics Ltd., UK - AO held the payments made to Symbiotics Ltd.UK to be in the nature of royalty - HELD THAT - The assessee does not get any right to use the copyright in the software as it merely has access to the information / data processed by the software / application which is owned and executed by Symbiotics Ltd. UK in its server located in UK. What the appellant gets is only a copyrighted article to use the product for its internal business purpose and not any right in any copyright to exploit the same for commercial reasons so as to constitute the payment received in consideration thereof as royalty in terms of Article 13 of the India UK DTAA. Support may be drawn by the decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT - In sum and substance what Symbiotics Ltd. UK is doing for the assessee is merely testing the ability of the candidates as per the parameters / standards of the assessee so as to ascertain whether the candidates meet the quality / performance criteria of the assessee. Having considered all the above aspects, we are of the view that the consideration paid by the assessee to Symbiotics Ltd. UK for provision of candidate s reports do not fall within the purview of royalty under Article 13 of the India- UK DTAA. Having held above that the impugned payment to Symbiotics Ltd. UK is not royalty and the fact that the Symbiotics Ltd. UK has no PE in India and therefore not assessed to tax in India, the assessee has no obligation to withhold tax on the impugned payment made by it to Symbiotics Ltd. UK u/s 195 of the Act. It is well settled position of law that the tax is required to be withheld in respect of payments made to a non resident only if such payment is chargeable to tax in India. Decided in favour of the assessee.

Summary

Issues Involved:
1. Legality of the assessment order and violation of natural justice.
2. Disallowance of depreciation on CISCO IP Phones.
3. Disallowance under section 40(a)(i) for alleged non-deduction of tax at source on payments to Symbiotics Ltd., UK.

Summary:

1. Legality of the Assessment Order and Violation of Natural Justice:
The assessee contended that the assessment order dated 27.12.2019 and the CIT(A)'s order dated 30.08.2022 were illegal and violated principles of natural justice. The CIT(A) was criticized for passing the order based on conjectures and without considering the assessee's submissions or providing an opportunity for a hearing.

2. Disallowance of Depreciation on CISCO IP Phones:
The CIT(A) restricted depreciation on CISCO IP Phones to Rs. 47,713 at 15% instead of Rs. 1,90,854 at 60% claimed by the assessee. The Tribunal noted that the issue was covered by a previous decision in the assessee's favor for AY 2016-17, which directed the AO to classify items based on their functional dependency on computers. The Tribunal remitted the issue back to the AO to follow this precedent and decide afresh.

3. Disallowance under Section 40(a)(i) for Non-Deduction of Tax at Source:
The CIT(A) upheld the AO's disallowance of Rs. 1,03,45,058 under section 40(a)(i) for non-deduction of tax on payments to Symbiotics Ltd., UK, treating the payments as "royalty" under both the Income Tax Act and the India-UK DTAA. The Tribunal examined the agreement between the assessee and Symbiotics Ltd., UK, and concluded that the payments were for candidate reports and did not involve the use of or right to use any intellectual property or software. The Tribunal held that the payments were not "royalty" under Article 13 of the India-UK DTAA and that Symbiotics Ltd., UK had no PE in India. Therefore, the assessee had no obligation to withhold tax under section 195. The disallowance under section 40(a)(i) was deleted.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting the issue of depreciation on CISCO IP Phones to the AO and deleting the disallowance under section 40(a)(i) for non-deduction of tax at source on payments to Symbiotics Ltd., UK. The assessment order's legality and natural justice issues were acknowledged but not separately adjudicated in this summary.