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2022 (7) TMI 1586 - AT - Income TaxTDS u/s 195 - payments in the nature of Royalty by holding that the payments were made for information concerning commercial experience in terms of Article 13(3) of the India-UK DTAA - HELD THAT - Deolitte Global Holdings has been incorporated by DTTI to facilitate attainment of various objectives to further international alignment co-operation cohesion and professional standards of highest quality amongst its member firms such as the appellants herein. It incurs expenses for the above activities for the benefit of all the members which are then recovered from the members without any mark-up. The terms on which the activities are carried out by Holdings and the expenses recovered by it from the members have been enshrined in the Shared Services Agreement . Though there are many services which have been enumerated in the said Shared Services Agreement however the dispute is with regard to the payments made under the head global brand global communication and global technology/knowledge management. Providing common policies or guidance relating to the brand and collaborating with member firms ostensibly cannot be reckoned as use of or right to use any copyright of literary artistic or scientific work. Holdings only perform various activities for its members and its guidance is only for internal use by the member firms. Hence in our view payment for such services cannot be considered for information concerning industrial scientific or commercial experience. Again there is no transfer of intellectual property by Holdings to the appellants and also there cannot be a case of giving industrial commercial or scientific equipment. Thus 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. Payments for global activities given in Global Communication Holdings distributes the publications and reports for DTTI and support global public relations thought leadership initiatives events guidance common standards guidelines organising internal events etc so that there is alignment of all the member firms for internal and external communication. It gives guidance about the media communication distribution of newsletter external and internal distribution. From a bare perusal of aforesaid activities it cannot be held that it is for use of or right to use of any copyright of literary artistic or scientific work or for any other terms given in Article 13(3). Further it also cannot be held for information concerning industrial or scientific experience and/or for commercial experience because the basic underlying fact is that it is purely for internal use of member firms and not for any third party or any client. Thus these activities cannot be reckoned for providing industrial commercial or scientific equipment to the appellants and therefore outside the nature and scope of Royalty as defined in Article 13(3) of the India-UK DTAA. As regards the services mentioned in global technology/global management from the bare perusal of the same it cannot be said to be for use of or right to use any copyright or any literary artistic or scientific work or any transfer of intellectual property rights. The software acquired by the network and distributed to the members does not include payment for use of or right to use computer software as it has merely obtained a licenced product from vendors for use of member firms. The licensee was allowed to use the software only for its own business purpose and is not permitted to transfer copy of the software and as such there is no transfer of any right in respect of copyright by the vendors and it is a case of mere transfer of copyrighted article. Thus 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. In this case also AO has heavily relied upon the same judgment of AAR in the case of EY Global Services Ltd which now stands reversed by the Hon ble Delhi High Court 2021 (12) TMI 571 - DELHI HIGH COURT Thus we hold that the payments made to Holdings is not taxable as Royalty under Article 13(3) of the India-UK DTAA. As in all the appeals the payments made to Deloitte Global Holdings Ltd. do not fall in the scope and definition of Royalty under Article 13(3) of India UK DTAA and consequently appellants were not required to deduct TDS while making the payment. Thus all the appeals of the assessees are allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issue considered in this judgment was whether the appellants, Deloitte Touche Tohmatsu India LLP and Deloitte Haskins & Sells LLP, were required to deduct tax at source under Section 195 of the Income Tax Act, 1961, from payments made to Deloitte Global Holding Services Limited. The appellants challenged this requirement on several grounds: the principle of consistency, the principle of mutuality, the nature of the payments as reimbursements, and the assertion that the payments were not in the nature of Royalty. ISSUE-WISE DETAILED ANALYSIS Relevant legal framework and precedents: The relevant legal framework involves Section 195 of the Income Tax Act, 1961, concerning tax deduction at source on payments to non-residents, and Article 13(3) of the India-UK Double Taxation Avoidance Agreement (DTAA), which defines "royalties." Precedents considered include decisions from various Indian courts and tribunals, as well as the Supreme Court's ruling in the case of Engineering Analysis Centre of Excellence (P) Ltd. Court's interpretation and reasoning: The Tribunal focused on whether the payments made by the appellants to Deloitte Global Holdings constituted "royalties" under Article 13(3) of the India-UK DTAA. The Tribunal analyzed the nature of the services provided under the "Shared Services Agreement" and determined that these services did not involve the transfer of any copyright or intellectual property rights. The Tribunal also considered the principle of consistency, noting that similar payments in previous years were not subjected to tax deduction at source. Key evidence and findings: The Tribunal examined the Shared Services Agreement and the nature of services provided by Deloitte Global Holdings, which included global brand strategy, communications, and technology/knowledge management. It was found that these services were for internal use by member firms and did not involve the transfer of intellectual property or confidential information. Application of law to facts: The Tribunal applied Article 13(3) of the India-UK DTAA to the facts, concluding that the payments did not fall within the definition of "royalties" as they did not involve the use of or right to use any copyright, trademark, or information concerning industrial, commercial, or scientific experience. Treatment of competing arguments: The Tribunal addressed the Department's argument that the payments were for information concerning commercial experience, concluding that the services provided were for internal use and did not involve any commercial exploitation or transfer of intellectual property. The Tribunal also considered the principle of mutuality and reimbursement but found these arguments moot given its primary conclusion. Conclusions: The Tribunal concluded that the payments made by the appellants to Deloitte Global Holdings did not constitute royalties under Article 13(3) of the India-UK DTAA and were not subject to tax deduction at source under Section 195 of the Income Tax Act, 1961. SIGNIFICANT HOLDINGS The Tribunal held that the payments in question were not royalties as defined under Article 13(3) of the India-UK DTAA. It emphasized that the services provided by Deloitte Global Holdings were for internal use by member firms and did not involve the transfer of any intellectual property or confidential information. The Tribunal also noted that the principle of consistency should apply, given that similar payments in previous years were not subjected to tax deduction at source. Core principles established: The Tribunal established that for payments to be considered royalties under the India-UK DTAA, there must be a transfer of copyright or intellectual property rights. Payments for internal services that do not involve such transfers do not constitute royalties. Final determinations on each issue: The Tribunal determined that the payments made by the appellants to Deloitte Global Holdings were not royalties and were not subject to tax deduction at source. Consequently, the appeals of the appellants were allowed.
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