2024 (6) TMI 809 - AT - Income Tax

TDS u/s 195 - withholding tax demand AO towards the TDS and interest thereon - foreign remittance to various parties against the services being clinical trial, professional consultancy, and market survey - interpretation of the make available clause in tax treaties - CIT(A) was pleased to delete the demand raised by the AO - HELD THAT - As far as the issue of withholding tax on remittance made to USA-Canada based 7 parties for clinical trial and professional consultancy from Cambridgesoft Corp. USA where DTAA has specific provision regarding FTS is concern, we find that such issue is covered in favour of the assessee by the order of this Tribunal in the own case of the assessee for AY 2010-11 2017 (1) TMI 554 - ITAT AHMEDABAD it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon'ble Court were clearly not satisfied. There mere fact that there were certain technical inputs or that the assessee immensely benefited from these services, even resulting in value addition to the employees of the assessee, is wholly irrelevant. The expression 'make available' has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer. Payment made for use of science data base, subscription of journal Publication is also covered in favour of the assessee by the order of this Tribunal in the own case of the assessee for AY 2010-11 2017 (1) TMI 554 - ITAT AHMEDABAD as held as a matter of fact, the AO righty noted that 'royalty' has been defined as payment of any kind received as a consideration for the use of, or right to use of, any copyright of literary, artistic or scientific work and that the expression literary work , under section 2(o) of the Copyright Act, includes 'literary database' but then he fell in error of reasoning inasmuch as the payment was not for use of copyright of literary database but only for access to the literary database under limited non exclusive and non transferable licence. Even during the course of hearing before us, learned Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view, it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments. This view is also supported by case of Dun Bradstreet Information Services India (P.) Ltd 2011 (7) TMI 957 - BOMBAY HIGH COURT . Thus we hereby do not find any reason to interfere with the finding of the learned CIT(A) to extent of demand raised under section 201(1)/201(1A) of the Act on account of payment made to 7 USA-Canada based parties on clinical trial, consultancy fees, Cambridge soft Corp. USA and the payment made to 3 parties for access of chemistry data base, science publication and science journals. Payment made to Cambridgesoft corporation against purchase of ChemOffice enterprise - We find that the impugned payment represents the outright purchase of the software which cannot be treated as royalty and consequently, the same is outside the purview of the TDS provisions under section 195 of the Act. In holding so, we draw support and guidance from the judgment of Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT wherein it was observed that the transaction of software purchase on principal-to-principal basis cannot be considered as royalty payment. Hence, the demand raised by the AO is hereby deleted. Payment made to 2 Thailand based company for bio equivalent study - We find that there is no dispute that there is no specific provision for taxation of fees for technical services in India Thailand tax treaty. Thus, the profits earned by rendering fees for technical services are only a species of business profits just as the profits any other economic activity. Likewise, there is also no dispute that Thailand based companies did not have any permanent establishments in India. Thus, the income earned by a resident of a contracting state by carrying on business in the other contracting state cannot be taxed in the source state unless such a resident has a permanent establishment in the other contracting state, i.e. source state. In holding so, we draw support and guidance from the order of this Tribunal in the case of DCIT Vs. Welspun Corporation limited 2017 (1) TMI 1084 - ITAT AHMEDABAD Payment made to Srilanka based party namely Swiss Biogenics Ltd Sri Lanka for Market Survey/development - AO treated the services of market survey under the preview of technical services as defined under the explanation 2 to section 9(1)(vii) of the Act. On the hand, CIT-A held that such payment falls under the exception clause (b) of section 9(1)(vii) of the Act regarding the fees for technical services and thus deleted the demand raised by the AO. In this regard, we find that in the case of Evolv Clothing Co. Pvt. Ltd. 2018 (6) TMI 1324 - MADRAS HIGH COURT has held that the payment for market survey is equivalent to sales agent commission. Hence, the same cannot fall within the definition of FTS. Therefore, the provisions of section 9(1)(vii) are not applicable and thus the demand raised by the AO is deleted. In view of the above detailed discussion, the grounds of appeal raised by the Revenue are hereby dismissed. Appeal of revenue dismissed.

Summary

Issues Involved:
1. Classification of payments for clinical trials as fees for technical services (FTS).
2. Interpretation of the "make available" clause in tax treaties.
3. Classification of payments for online access to databases, publications, and journals as royalty.
4. Classification of payments for software purchase as royalty.
5. Taxability of payments to Thai entities for clinical trials/bio-equivalence studies under the India-Thailand DTAA.
6. Classification of payments to Swiss entities for market survey/development expenses as FTS.

Detailed Analysis:

1. Classification of Payments for Clinical Trials as Fees for Technical Services (FTS):
The revenue contended that payments made to various foreign entities for clinical trials should be classified as FTS under the relevant tax treaties. The AO argued that these services were highly technical and involved the transfer of technical knowledge, thus falling under the definition of FTS. However, the CIT(A) and the ITAT found that these payments did not involve the transfer of technology that would enable the recipient to perform the services independently in the future. The ITAT upheld the CIT(A)'s decision, stating that "mere provision of technical services is not enough to attract withholding tax under the DTAA."

2. Interpretation of the "Make Available" Clause in Tax Treaties:
The CIT(A) and the ITAT emphasized the importance of the "make available" clause in tax treaties with the USA and Canada. The clause requires that for payments to be classified as FTS, the service provider must transfer technical knowledge or skills to the recipient, enabling them to perform the services independently in the future. The ITAT cited the Delhi High Court's decision in Guy Carpenter & Co Ltd. and the Karnataka High Court's decision in De Beers India Minerals (P.) Ltd., which clarified that the mere provision of technical services does not satisfy the "make available" requirement.

3. Classification of Payments for Online Access to Databases, Publications, and Journals as Royalty:
The AO argued that payments for online access to databases, publications, and journals should be classified as royalty under Section 9(1)(vi) of the Income-tax Act. However, the CIT(A) and the ITAT found that these payments were for access to copyrighted material, not for the use of the copyright itself. The ITAT referred to the Bombay High Court's decision in Dun & Bradstreet Information Services India (P.) Ltd., which distinguished between the use of copyrighted material and the use of the copyright.

4. Classification of Payments for Software Purchase as Royalty:
The AO classified payments for the purchase of ChemOffice enterprise software as royalty. However, the CIT(A) and the ITAT disagreed, stating that the payment was for the outright purchase of software and did not involve the use of copyright. The ITAT cited the Delhi High Court's decision in Nokia Networks OY, which held that software purchases on a principal-to-principal basis do not constitute royalty payments.

5. Taxability of Payments to Thai Entities for Clinical Trials/Bio-Equivalence Studies Under the India-Thailand DTAA:
The AO argued that payments to Thai entities for clinical trials/bio-equivalence studies should be classified as FTS and taxed in India. However, the CIT(A) and the ITAT found that the India-Thailand DTAA does not have a specific provision for FTS, and the payments should be classified as business profits. Since the Thai entities did not have a permanent establishment (PE) in India, the payments were not taxable in India. The ITAT referred to the Madras High Court's decision in Bangkok Glass Industry Co. Ltd. and the ITAT's decision in Welspun Corporation Ltd., which supported this interpretation.

6. Classification of Payments to Swiss Entities for Market Survey/Development Expenses as FTS:
The AO classified payments to Swiss Biogenics Ltd. for market survey/development expenses as FTS. However, the CIT(A) and the ITAT found that these payments were for services rendered and utilized outside India, falling under the exception clause of Section 9(1)(vii)(b) of the Income-tax Act. The ITAT referred to the Madras High Court's decision in Evolv Clothing Co. Pvt. Ltd., which held that payments for market surveys are equivalent to sales agent commissions and do not constitute FTS.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the withholding tax demand of Rs. 3,46,277,17.00, finding that the payments in question did not fall under the definitions of FTS or royalty as argued by the revenue. The appeal of the revenue was dismissed, and the order was pronounced on 17/05/2024 at Ahmedabad.