2014 (1) TMI 1285 - AT - Income Tax

Nature of payment Payment can be treated as Royalty u/s 9(1)(vi) of the Act r.w Article 12 of DTAA or not - Benefit of tax treaty between India and Singapore Assessee resident of Singapore Held that - The nature of services rendered to the appellant does not qualify for the definition of royalty either in terms of the Income-tax Act, 1961 or the DTAA between India and Sri Lanka - there is no specific clause relating to taxation of fee for technical services in India-Sri Lanka DTAA - the payments made by appellant to CSPL can only be taxed as business profit under Article 7 of the DTAA and not as fee for technical services under the provisions of domestic law - business profits of CSPL or CTU or Sites cannot be taxed in India and it is held that no tax is required to be deducted in respect of payment made by the appellant to CSPL for conducting clinical trials outside India. The services in question are services for supply of information which assessee is not using for any technical know how but it is working as a conduit for supply of this information further to BHAG - Thus, the assessee is making remittance for procurement of commercial information for onward transmission to the principal BHAG - the remittance made by the assessee is not for availing technical services and does not amount to royalty and is not liable for withholding taxes as held by assessing officer - The order of CIT(A) is upheld Decided against Revenue.

Summary

Issues:
- Determination of withholding tax rate for remittance of clinical research operational fees to a company in Sri Lanka.
- Whether the remittance made constitutes royalty or business profit under the India-Sri Lanka Double Taxation Avoidance Agreement (DTAA).
- Applicability of withholding tax on the remittance for clinical services.

Analysis:
- The Revenue appealed against the order of CIT(A) reversing the ITO's order under section 195 of the Income-tax Act, 1961, concerning the remittance to a company in Sri Lanka for clinical trials. The assessing officer held the remittance to be in the nature of royalty, subject to withholding tax at 10%. The CIT(A) allowed the appeal, stating that the remittance did not require withholding tax as it was not royalty but business profit, as per the DTAA between India and Sri Lanka.

- The dispute centered on whether the payment made by the appellant to the company in Sri Lanka constituted royalty or business profit. The Revenue argued that the remittance amounted to royalty under the Income-tax Act and the DTAA, citing the Supreme Court's judgment on the character of the receipt. However, the appellant contended that the payment was for business activities related to clinical research, not technical information, and relied on various court judgments supporting the classification of such payments as business profits.

- The ITAT upheld the CIT(A)'s decision, emphasizing that the remittance was for the supply of general information and not technical knowledge, hence not constituting royalty. The ITAT noted that the appellant was procuring commercial information for transmission to the principal company, not for technical services. Therefore, the remittance was not subject to withholding tax as held by the assessing officer. The ITAT dismissed the Revenue's appeal, affirming the CIT(A)'s order.

In conclusion, the judgment clarified the nature of the remittance for clinical services to a company in Sri Lanka, determining it to be business profit rather than royalty, and thus not liable for withholding tax under the India-Sri Lanka DTAA. The decision provided a detailed analysis of the payment's classification, considering the specific provisions of the DTAA and relevant court precedents, ultimately upholding the CIT(A)'s order in favor of the appellant.