2025 (1) TMI 1530 - AT - Income Tax

TDS u/s 195 - payments made in the nature of royalty under Article 13(3) of the India-UK Double Taxation Avoidance Agreement (DTAA) - payments made towards Global brand Global Communications and Global technology/Knowledge Management - HELD THAT - As relying on Deloitte Touche Tohmatsu India LLP and Deloitte Haskins Sells LLP 2022 (7) TMI 1586 - ITAT MUMBAI assessee are not liable to deduct tax source on payments made to Deloitte Global Holdings Ltd. as the impugned payments do not fall within the scope and definition of Royalty under Article 13(3) of India UK DTAA. Decided against revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

1. Whether the payments made by the assessees to Deloitte Global Holdings Services Limited for Global brand, Global Communications, and Global Technology/Knowledge Management were in the nature of royalty under Article 13(3) of the India-UK Double Taxation Avoidance Agreement (DTAA), and thus liable for taxation in India.

2. Whether the CIT(A) erred in directing the Assessing Officer to grant a refund of taxes paid pursuant to the order under section 195(2) despite the department's appeal against the ITAT's decision.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Nature of Payments as Royalty

Relevant Legal Framework and Precedents

The determination of whether the payments constitute royalty hinges on Article 13(3) of the India-UK DTAA, which defines royalties to include payments for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, and for information concerning industrial, commercial, or scientific experience.

The Assessing Officer relied on precedents such as CIT vs Synopsis International Old Ltd, Shell India Markets (P) Ltd., and others to classify the payments as royalties. However, the Tribunal's decision in Engineering Analysis Centre of Excellence (P) Ltd. vs CIT and EY Global Services Ltd. vs ACIT were pivotal in the current analysis.

Court's Interpretation and Reasoning

The Tribunal examined the Shared Services Agreement, which outlined the nature of services provided by Deloitte Global Holdings. The Tribunal determined that the services were for internal use and did not involve the transfer of any intellectual property or confidential information. The payments were not for the use of any copyright or for information concerning commercial experience as defined under Article 13(3).

Key Evidence and Findings

The Shared Services Agreement indicated that Deloitte Global Holdings provided services such as brand strategy, communication support, and technology management for internal alignment and cohesion among Deloitte member firms. The agreement emphasized that these services were not for commercial exploitation or third-party use.

Application of Law to Facts

The Tribunal applied the principles from the Engineering Analysis Centre of Excellence (P) Ltd. case, which clarified that payments for software use without transferring copyright do not constitute royalties. Similarly, the Tribunal found that the payments in question did not involve any transfer of copyright or confidential information and were therefore not royalties.

Treatment of Competing Arguments

The Tribunal addressed the department's reliance on previous judgments by highlighting the Supreme Court's decision in Engineering Analysis, which overruled the rationale used in those cases. The Tribunal also dismissed the department's argument that the payments were for information concerning commercial experience, noting the internal and non-commercial nature of the services.

Conclusions

The Tribunal concluded that the payments made by the assessees to Deloitte Global Holdings were not in the nature of royalties under Article 13(3) of the India-UK DTAA and, therefore, not subject to tax in India.

Issue 2: Refund of Taxes Paid

The Tribunal upheld the CIT(A)'s decision to direct the refund of taxes paid, as the payments were not taxable as royalties. The Tribunal found no infirmity in the CIT(A)'s order, given the consistent application of the Tribunal's earlier decision in similar cases.

SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning

"The payments made for global brand cannot be treated as in the nature of Royalty as per Article 13(3) of India-UK DTAA. Another important thing is that the payment is also not for any use of trademark/patent provided by Holdings."

"The payments made for the activities/services under the aforesaid three heads cannot be held to be in the nature of Royalty as per the definition given in Article 13(3) of the India-UK DTAA and, accordingly, the payments made by the appellants to Holdings cannot be held to be Royalty."

Core Principles Established

The Tribunal established that for a payment to be classified as royalty under Article 13(3) of the India-UK DTAA, it must involve the transfer of copyright or confidential information. Payments for internal services without such transfer do not constitute royalties.

Final Determinations on Each Issue

The Tribunal determined that the payments made by the assessees to Deloitte Global Holdings were not royalties and thus not taxable in India. Consequently, the assessees were not required to deduct tax at source on these payments, and the CIT(A)'s order to refund taxes paid was upheld.