2025 (3) TMI 1212 - 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 - Tribunal in assessee s own case for A.Y.2018-19 and 2019-20 2022 (7) TMI 1586 - ITAT MUMBAI held that payments made to Deloitte Global Services Pvt. Ltd. do not fall in the scope and definition of royalty under Article 13(1) of India UK DTAA and consequently assessee was not required to deduct tax while making the payment to DGSHL. Thus we hold that the payments made to DGSHL do not fall within the scope and ambit of royalty under Article 13 of India UK DTAA and consequently assessee was not required to deduct TDS while making the payment. Appeal of the Revenue is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

1. Whether the payments made by the assessee to Deloitte Global Holdings Services Limited (DGSHL) 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 subject to taxation in India.

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

ISSUE-WISE DETAILED ANALYSIS

1. Nature of Payments as Royalty under Article 13(3) of the India-UK DTAA

Relevant Legal Framework and Precedents:

The definition of "royalties" under Article 13(3) of the India-UK DTAA includes payments for the use of or the right to use any copyright, patent, trademark, or for information concerning industrial, commercial, or scientific experience. The court considered precedents including the Supreme Court decision in Engineering Analysis Centre of Excellence (P) Ltd. and the Delhi High Court decision in EY Global Services Ltd.

Court's Interpretation and Reasoning:

The Tribunal found that the payments in question were not for the use of any copyright or for information concerning industrial, commercial, or scientific experience. The services provided under the Shared Services Agreement were for internal use among Deloitte member firms and did not involve any transfer of intellectual property or confidential information.

Key Evidence and Findings:

The Tribunal reviewed the Shared Services Agreement, which outlined the nature of the services provided by DGSHL. The services were aimed at facilitating international alignment, cooperation, and professional standards among Deloitte member firms. The Tribunal noted that DGSHL operated on a break-even basis, recovering costs from member firms without any markup.

Application of Law to Facts:

The Tribunal applied Article 13(3) of the DTAA to the facts and determined that the payments did not constitute royalties. The services were not for the use of any copyright or for imparting information concerning commercial experience, as they were for internal guidance and standardization within the Deloitte network.

Treatment of Competing Arguments:

The Revenue argued that the payments were for commercial experience and thus constituted royalties. However, the Tribunal rejected this, emphasizing that the services were for internal use and did not involve any transfer of intellectual property or confidential information.

Conclusions:

The Tribunal concluded that the payments made to DGSHL did not fall within the definition of royalties under Article 13(3) of the India-UK DTAA and were not taxable in India.

2. Refund of Taxes Paid Pursuant to Section 195(2) Order

Relevant Legal Framework and Precedents:

Section 195(2) of the Income Tax Act pertains to the deduction of tax at source on payments made to non-residents. The Tribunal considered the consistency of previous rulings and the principle of non-taxability under the DTAA.

Court's Interpretation and Reasoning:

The Tribunal upheld the CIT(A)'s direction to grant a refund, as the payments were not taxable as royalties under the DTAA. The Tribunal emphasized the principle of consistency, noting that similar payments in previous years were not subject to tax deduction.

Key Evidence and Findings:

The Tribunal found that the CIT(A) correctly followed the precedent set in the assessee's own case for previous assessment years, where similar payments were not considered royalties.

Application of Law to Facts:

The Tribunal applied the principle of consistency and the non-taxability of the payments under the DTAA to conclude that the refund was justified.

Treatment of Competing Arguments:

The Revenue's appeal against the CIT(A)'s direction for a refund was dismissed, as the Tribunal found no basis for treating the payments as taxable royalties.

Conclusions:

The Tribunal concluded that the CIT(A) did not err in directing the refund of taxes, as the payments were not taxable under the DTAA.

SIGNIFICANT HOLDINGS

The Tribunal held that:

"The payments made to Deloitte Global Holdings Ltd. do not fall in the scope and definition of Royalty under Article 13(3) of the India UK DTAA and consequently appellants were not required to deduct TDS while making the payment."

Core Principles Established:

The Tribunal reaffirmed the principle that payments for internal services within a network of firms, which do not involve the transfer of intellectual property or confidential information, do not constitute royalties under the DTAA.

Final Determinations on Each Issue:

1. The payments to DGSHL were not royalties and were not taxable under the India-UK DTAA.

2. The CIT(A) was correct in directing the refund of taxes paid, as the payments were not subject to tax deduction under section 195(2).

The appeal of the Revenue was dismissed, and the Tribunal's decision was pronounced on 18th February, 2025.