2023 (3) TMI 358 - AT - Income Tax

TDS u/s 195 - Royalty payment - applicability of DTAA between India and Netherland defining term royalty as per Article 12 of such DTAA - HELD THAT - CIT(A) simply upheld the findings of the ld. A.O on the basis of the provisions of the Act but whether the assessee s transaction is covered under the definition of royalty or fees for technical services as per Article 12 of the relevant DTAA CIT(A) has not given any finding in this regard. The order of ld. CIT(A) suffers from lack of verification of facts and applicability of legal provisions in the subject matter of the case. Neither the ld. A.O nor the ld. CIT(A) has given a categorical finding regarding the nature of business of the assessee and what facts verification are conducted in determining the transaction of the assessee nothing has been brought on record. A.O has stated in his order that there is inherent use of the server and therefore the service charge paid will amount to royalty but what is this inherent use and how the business of the assessee is working so far as the use of server is concerned. these detailed examination and results has not been brought out in the order. Most important whether the provision of the relevant DTAA regarding royalty and fees for technical services are applicable in the case of the assessee or not has to be re-examined. Even the ld. .D.R has submitted specifying the agreement of Softlayer Technologies Inc. and therein it has been clearly spelt out regarding use of trademark that such trademark ownership is exclusively with Softlayer Technologies Inc. and that the assessee has right only to use such trademark. If it is the right to use trademark then that is covered within the definition of royalty as per Article 12 of the relevant DTAA. Therefore this agreement (supra) also has to be looked into along with the provisions of DTAA. A.O shall come out with a speaking order on all these aspects after due verification. In view thereof we set aside the order of the ld. CIT(A) and remand the matter to the file of the ld. A.O for re-adjudication as per law after complying with principles of natural justice. The grounds are allowed for statistical purposes.

Summary

Issues Involved:

1. Applicability of Section 9(1)(v), (vi), and (vii) of the Income-tax Act, 1961, and the necessity of a Permanent Establishment (PE) in India for non-residents.
2. Relevance of Double Taxation Avoidance Agreement (DTAA) provisions between India and the Netherlands.
3. Classification of payments as "royalty" or "fees for technical services" under the Income-tax Act and DTAA.

Issue-wise Detailed Analysis:

1. Applicability of Section 9(1)(v), (vi), and (vii) of the Income-tax Act, 1961, and the necessity of a Permanent Establishment (PE) in India for non-residents:

The assessee argued that the payments made to non-residents were not subject to TDS as the non-residents did not have a PE in India. The Assessing Officer (A.O) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that, post the amendment by the Finance Act, 2012, the applicability of Section 9(1)(v), (vi), and (vii) is independent of whether the non-resident has a PE in India. The A.O held that the payments were taxable in India as they constituted "royalty" and "fees for technical services," and thus, TDS was required under Section 195. Consequently, a disallowance under Section 40(a) was made for non-deduction of TDS.

2. Relevance of Double Taxation Avoidance Agreement (DTAA) provisions between India and the Netherlands:

The assessee contended that the provisions of the DTAA between India and the Netherlands should override the Income-tax Act, and as per Article 12 of the DTAA, the payments did not qualify as "royalty" or "fees for technical services." The CIT(A) did not address the DTAA provisions and upheld the A.O's decision based solely on the Income-tax Act. The Tribunal observed that both the A.O and CIT(A) failed to analyze the DTAA's applicability and the nature of the assessee's transactions vis-à-vis the DTAA provisions.

3. Classification of payments as "royalty" or "fees for technical services" under the Income-tax Act and DTAA:

The A.O classified the payments for server usage as "royalty" and "fees for technical services," arguing that the right to use the server constituted "royalty." The Tribunal noted that the A.O did not adequately examine the business functions of the assessee and the specific terms of the agreement with Softlayer Technologies Inc., which included trademark terms. The Tribunal highlighted that the right to use a trademark falls under the definition of "royalty" as per Article 12 of the DTAA. The Tribunal emphasized the need for a detailed examination of the agreement and the business operations to determine the correct classification of the payments.

Conclusion:

The Tribunal set aside the order of the CIT(A) and remanded the matter to the A.O for re-adjudication. The A.O was directed to issue a speaking order after thoroughly examining the provisions of the DTAA, the nature of the assessee's business, and the specific terms of the agreement with Softlayer Technologies Inc. The re-adjudication should comply with the principles of natural justice and consider whether the payments fall under the definitions of "royalty" or "fees for technical services" as per the DTAA and the Income-tax Act. The appeal was allowed for statistical purposes.