TMI Blog2018 (7) TMI 294X X X X Extracts X X X X X X X X Extracts X X X X ..... se of technical knowledge, both the AO and CIT(A) have erred in considering the fee as in the nature of royalty. Since there is no transfer of technology or use of any technology and payment is only simply for affiliation, the above amount cannot be considered as ‘royalty’ either under the provisions of Income Tax Act or under the provisions of DTAA. The affiliation fee cannot be considered as taxable income of non-resident so as to attract TDS provisions. - Decided in favour of assessee. - I.T.A. No. 438/HYD/2017 - - - Dated:- 4-7-2018 - SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Shri G.V. Gurunathan, AR For The Revenue : Shri D. Prasad Rao, DR ORDER PER B. RAMAKOTAIAH, A.M. : This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 28-12-2016, on the issue of treating a payment of ₹ 12,44,072/- ($35,000) to M/s. Balanced Scorecard Collaborative inc. of USA, towards application fee. 2. Briefly stated, assessee is a company. It has filed return of income for the AY. 2006-07 on 27-11-2006 declaring ₹ 3,19,150/- as income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nization , In this case, Affiliate fees refer to fee paid towards association with M/s. Balanced Scorecard Collaborative Inc. As such there is no income accruing to the non-resident in India. This fee paid is not towards: Transfer of any rights Imparting of any information, Use of any patent, invention, design, model, secret formula Imparting of any information concerning technical, industrial, commercial, scientific knowledge, experience, skill The use or the right to use any industrial, commercial or scientific equipment Transfer of all or any rights in respect of copyright, literary, artistic or scientific works. As the affiliate fee paid is not in the nature of Royalty and does not fall as referred by the AO in his order to the explanation 2 to sec 9(1) of the Act. Further it does not fall under the meaning of Royalty as defined in Article 12(3) in DTAA between India and USA which is reproduced as under: The term royalties as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment. That exercise was not carried out by AO on the facts of this case. The AO was thus clearly in error in proceeding to invoke disallowance under section 40(a)(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance. 4. Ld.CIT(A), however, extracted some of the clauses of the agreement and after detailed discussion held that the payment is in nature of royalty under the Income Tax Act and DTAA as well. 5. Contending the above order, assessee has raised grounds and additional grounds and placed paper book on record. 6. Ld. Counsel referring to the submissions made before authorities and magazines placed in the paper book submitted that the assessee has paid an affiliation fee only and not any further payments towards consultancy and technical know-how. What the assessee got in return was a few published magazines and had not paid any royalty or technical know-how fee or any further fee, the terms of which Ld.CIT(A) relied on. While agreeing that the theoretical analysis of Ld.CIT(A) is correct, it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to increase or decrease on changing economic conditions. The annual fee does not provide for any transfer of technology. However, there is further fee to be paid Fees on consulting and reports in para 4 of the agreement. This fee will be paid based on the performance, targets achieved by assessee in consulting technology, tools etc. What assessee has paid and claimed was only an affiliation fee and not the fee on consulting and reports. Since the payment of affiliation fee does not involve any transfer of technical knowledge or use of technical knowledge, the entire case law relied upon by the Ld.CIT(A)/AO does not apply to the facts of the case. 8.1. As seen from the paper book placed on record, what assessee got is in the form of two magazines which are published by the Harvard Business School with a title Balanced Scorecard Report . This magazine, short of management jargon, is nothing but a periodical magazine with various write- ups, which cannot be considered as a right to use a copy right. Assessee being management consultant, the agreement with M/s. Balanced Scorecard Collaborative inc. of USA, had this high sounding management terminology, but put it simply assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see as its share. As such on facts the present case does not partake the nature of royalty as contemplated under clause 3(a) of article 12 of the Indo-US DTAA. [Paras 8.12 and 8.13] Thus, the remittances made to eCornell (TILS) do not fall in the category of royalty as considered in clause 3(a) of article 12 of the Indo-US DTAA. [Para 9.6] 8.3. Since the payment of affiliation fee alone do not result in either providing any technical service or use of technical knowledge, we are of the opinion that both the AO and CIT(A) have erred in considering the fee as in the nature of royalty. Since there is no transfer of technology or use of any technology and payment is only simply for affiliation, the above amount cannot be considered as royalty either under the provisions of Income Tax Act or under the provisions of DTAA. The respective provisions are extracted in detail in the submissions of assessee before the CIT(A) stated above as well. We do not intend to repeat the same for the sake of brevity. Suffice to say that the affiliation fee cannot be considered as taxable income of non-resident so as to attract TDS provisions. Therefore, the disallowance u/s. 40(a)(ia) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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