ITAT: Assessees Payment to Non-resident Supplier Constitutes Royalty & Eligible for TDS Deduction

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the payment that the taxpayer has made to the non-resident supplier shall be the royalty amount and is bounded on the taxpayer’s portion to deduct tax at source.

The two-member bench of T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) has observed that the introduction of Explanation 5 in Section 9(1)(iv) of the Income Tax Act has enlarged the scope of the definition of “Royalty”.

Under Explanation 5 in section 9(1)(iv), the royalty consists of the consideration for any right, property, or details. The same would be intangible if the possession or the control of rights, property, or data is with the assessee or not if the rights, property, or data would get used via the assessee or whether the location of rights, property or the information is in India.

The taxpayer is engaged in the business of collecting market research data and performing surveys or interviews in various countries as per the project features mentioned by its clients. Acknowledging that it obtains the payments on the basis of cost per interview (CPI) basis. Towards making the questionnaire and survey design the taxpayer logs in to the web portal of NEBU, a Netherlands-based company, and uses its survey link for the objective. The taxpayer company imposes its customer for the data survey, and the taxpayer incurred the payments in 6 instalments to NEBU of Netherlands.

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The Assessing Officer reveals that the services which were furnished via NEBU of the Netherlands to its clients are royalties and fees for technical services under section 9(1)(vii). Hence, the taxpayer has been unable to withhold the tax prior to furnishing the payment to NEBU of the Netherlands.

Under Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA), the assessing officer ruled that the acknowledgement filed for the services made by NEBY comes in the meaning of the fees for the engaged services. Therefore the taxpayer needed to deduct the tax. Therefore the AO imposed a short deduction of the taxes and the interest.

The taxpayer has furnished the petition to CIT(A). The taxpayer, there is no permanent establishment of NEBU in India and filed a copy of the agreement between the taxpayer and NEBU. The customer would be provided with the right to use the software along with the relevant documents, the agreement specified.

CIT(A) supported the addition complying with the judgment of the Madras High Court for the case of Verizon Communications Singapore Pte. Ltd. vs. ITO. It ruled that the payment made via the Indian customers to the assessee towards furnishing the bandwidth/telecom services via the International Private Lease Circuit (IPLC) shall be subjected to be taxed as a “royalty”.

The taxpayer’s services were royalty in nature and pertains to tax deducted at source for the payments incurred to NEBU of the Netherlands, articulated by the department. Hence the assessing officer is correctly concerned about levying the short deductions of taxes and imposing the interest via taxpayers.

During dismissing the plea of the taxpayer, the tribunal mentioned that the revised provision of section 9(1)(iv) with explanation 5 furnishes a very broad meaning to the term “Royalty” and the same would bear upon the disputes, but then distinct clauses in the agreements that would be seen in a holistic way.