DEPUTY COMMISSIONER OF INCOME TAX(IT)-2(1)-2 MUMBAI, MUMBAI vs. DELOITTE TOUCHE TOHMATSU INDIA LLP, MUMBAI

The common grievance raised by the Revenue, in substance, is that the learned Commissioner (Appeals) erred in holding that the payments made by the assessee to Deloitte Global Holdings Services Limited towards Global Brand, Global Communications and Global Technology / Knowledge Management do not constitute “royalty” within the meaning of Article 13(3) of the India–UK Double Taxation Avoidance Agreement, and consequently in holding that no tax was required to be deducted at source under section 195 of the Act. The Revenue has further assailed the direction of the learned Commissioner (Appeals) to grant refund of taxes paid

At the very outset of the hearing, it was fairly admitted by both sides that the controversy involved in the present appeals stands squarely covered by a series of decisions rendered by this Tribunal in the assessee’s own case as well as in the cases of its group concerns, beginning from assessment year 2018–19 onwards, wherein identical payments made under the same Shared Services Agreement and examined on the same factual and legal parameters have been held not to be in the nature of royalty under the India– UK DTAA. The learned counsel for the assessee placed before us a compilation of such orders, and it was not disputed by the learned Departmental Representative that the facts in the present years are materially indistinguishable.

For the sake of convenience, we take up the appeal relating to assessment year 2020–21 as the lead case, and our findings recorded herein shall apply mutatis mutandis to the other assessment years under consideration.

The assessee is a limited liability partnership firm engaged in rendering professional services to large domestic and multinational clients and forms part of the global Deloitte network. In the course of its business, the assessee makes payments to Deloitte Global Holdings Services Limited, a company incorporated in the United Kingdom, under a ITA No.4653/Mum/2025 and others Deloitte Haskin & Sells LLP

During the relevant years, the assessee made an application under section 195(2) seeking authorization for remittance of amounts to Deloitte Global Holdings Services Limited without deduction of tax at source. The Assessing Officer, while disposing of the application, held that payments relatable to three categories of services, namely Global Brand, Global Communications and Global Technology / Knowledge Management, were in the nature of royalty, and accordingly directed deduction of tax at a proportionate rate. The learned Commissioner (Appeals), however, following the decisions of this Tribunal in the assessee’s own case for earlier years, held that the said payments did not fall within the scope of royalty under Article 13(3) of the India–UK DTAA and granted consequential relief.

This very issue has been examined in great detail by coordinate benches of this Tribunal in the assessee’s own case for assessment years 2018–19, 2019–20 and 2020–21, as well as in the cases of other Deloitte entities operating under the same global framework. The Tribunal, after an exhaustive analysis of the Shared Services Agreement, the nature of services rendered, and the applicable treaty provisions, has consistently held that such payments do not partake the character of royalty. For the sake of completeness and doctrinal continuity, the relevant portion of the Tribunal’s order in the assessee’s own case, containing the detailed factual narration and legal reasoning, is required to be incorporated here verbatim in the final order, and space for the same is consciously being left at this juncture.

1. The services provided under the Shared Service Agreement are enumerated at pages 540 to 543 of the paper book. In short, these are:

Global AERS; Global FAS; Global Tax; Global Consulting 2. Global Clients, Global Services and Related Programs 3. Global Strategy; Research; Monitoring 4. Global Brand 5. Global Communications 6. Global Talent/Human Resources 7. Global Technology / Knowledge Management 8. Global Risk Management and Regulations 9. Global Office of General Counsel 10. Global Finance; Procurement 11. Global Corporate Responsibility

In continuance with the earlier years, the appellants had made application for issuance of certificate under Section 195(2) for remittance of amounts under the “Shared Services Agreement” to Holdings without deduction of tax at source. It has been brought on record before us that, the respective Assessing Officer have issued certificates for financial year 2012-13 onwards till 2016-17 authorising the remittance of amounts similar to those which has been sought to be remitted in the current year without deduction of tax at source. The copies of these orders and the certificates have been placed in the paper book before us at pages 544 to 548. However, the ITA No.4653/Mum/2025 and others Deloitte Haskin & Sells LLP

The ld. CIT (A) upheld the action of the Assessing Officer on the conclusion that the payments were 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. The relevant observations of the ld. CIT (A) are as under :

i Thereafter, the ld. CIT(A) after incorporating the submissions made by the assessee about the nature of payments made for the global brand, global communication and global technology and knowledge management observed and held as under :

The shared Services Agreement is a standard business agreement. I had gone through clause 4 (Historical Services : Fees) and 5 (Service terms : Service Schedule; Revision; Notices) and 8 (Ownership and Licensing of Intellectual Property and Trademarks). The payment is undoubtedly for services. Para 8A reads as under :

In view of preceding discussion, I hold that the payment indeed is royalty within meaning of article 13(3) of India-UK Double Taxation Avoidance Agreement, as per discussion above. Hence grounds 21 to 28 are dismissed.

Having held that the sum is royalty, aspects regarding mutuality (grounds 7 to 17) and reimbursements of expenses has turned irrelevant. Hence corresponding grounds are not needed to be adjudicated. However regarding these, a discussion is made in paragraphs 21 to 23. 21. The point emphasized by appellant is that the arrangement is non-profit making exercise, reimbursement of common expenses and hence mutuality applies. Effectively it is claimed to be reimbursement of expenses. According to appellant, the expense is for specified purpose matches income is in pre- determined manner and there is no surplus to be taxed. This argument is valid if attempt is to tax the same as business profit, which is never the focus of this discussion. 22. Let us consider the receipt of Royalty income in accordance with provisions of Double Taxation Avoidance Agreement. Under Double Taxation Avoidance Agreement, income is not determined, but tax is determined as a fixed per cent of gross receipt. Irrespective whether there is profit or loss and whatever be its extent, tax is determined at a fixed rate. This is the manner in which receipt suffers tax in hands of recipient and extent and nature of expense does not count. Hence the aspect of mutuality and reimbursement of expenses are not relevant.”

Before us, the learned senior counsel, Shri Percy Pardiwala, after referring to various clauses of Shared Services Agreement and the background of the case submitted that the amounts in question cannot be regarded as payment for the use of copyright of literary work (computer software) as held by the Assessing Officer. In fact, it is purely for providing common policies, guidance relating to brand, communications and other aspects and collaboration with other member firms cannot be considered as use of or right to use any copyright of literary, artistic or scientific work. Payments for use of Global Technology/ Knowledge Management cannot be regarded as ITA No.4653/Mum/2025 and others Deloitte Haskin & Sells LLP

Mr. Percy Pardiwala submitted that now the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. vs CIT, 432 ITR 471 has reversed the view taken in the various decisions which have been relied upon by the Assessing Officer in coming to the contention that the payments were in the nature of Royalty. He further submitted that the Assessing Officer has heavily relied upon decision of the AAR in the case of EY Global Services Ltd., which was heavily relied upon by the AO in coming to the conclusion that the payments are made for use of copyright, has been reversed by the Hon'ble Delhi High Court in EY Global Services Ltd. vs. ACIT, 441 ITR 54 following the decision in Engineering Analysis (supra). The decision of the Hon'ble Delhi High Court has thereafter been followed by the Hon'ble ITAT, Delhi Bench in ITA Nos. 7017 to 7020/Del/2019 in the case of EY Global Services Ltd. vs. ACIT.

Mr. Percy Pardiwala further submitted that the payments in question, for rendering the services categorized as Global Brand, Global Communications and Global Technology and Knowledge Management cannot be regarded as payments for use of information concerning commercial experience as held by the ld. CIT(A). As can be seen from the Shared Service Agreement, Holdings does not have any dealings with third parties or clients but it only performs various activities for the benefit of its members. The guidance provided by Holdings to its members is for internal use by the member firms. It is essentially an agreement for rendering services within the Deloitte network. Therefore, the payment for such services cannot be considered as payments for use of information concerning commercial experience. No intellectual property is transferred by Holdings to the appellants. Moreover, provision

Another contention raised by him is that Holdings is a mutual concern inasmuch as there is complete identity between its participants and contributors. Holdings do not have any dealings with third party clients but wholly deals with member firms. Its activities are wholly performed for the benefit of member firms. Costs incurred in the course of performance of such activities are recovered from member firms by way of contributions without any mark-up. It operates on a break-even basis. Therefore, it must be regarded as a mutual concern. Accordingly, the payments made by the appellants to Holdings would not constitute its income. Consequently, there would be no requirement of deduction of tax at source there from. Payments made by M/s Deloitte Touche Tohmatsu, Delhi to DTT under an arrangement which is similar to the one with which the present appeals are concerned have been held to be covered by the principles of mutuality in ITA No. 6703/Del/2015 and connected appeals for the assessment years 2008-09 to 2011-12 by the Hon'ble ITAT, Delhi.

Lastly, he submitted that the payments are in the nature of reimbursements since Holdings operates on a break-even basis. The costs incurred by it in the course performing activities for the benefit of members are recovered from its members without any mark-up. In a particular year, there may be a surplus or deficit on account of over/under recovery but over time, it is intended to break-even. Therefore, the payments made by the appellants to Holdings being in the nature of reimbursements cannot be regarded as income.

On the other hand, the ld. Department Representative strongly relied upon the order of the Assessing Officer and ld.

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as the material referred to before us. As discussed above, the sole issue which permeates in all the appeals is, whether the appellants were liable to deduct tax at source under Section 195 of the Act on the payments made to Holdings by treating it to be Royalty under Article 13(3) of the India-UK DTAA. As noted above, 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.

1 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. 13. Now we have to analyse the scope of terms in light of the definition of „Royalty‟ as provided in the India- UK DTAA, which is enshrined in Article 13(3), which reads as under :-

As regards payment for items of global brands, it has been stated that Holdings assists in implementing brand strategy for use of network of Deloitte members and also provides member firms with common training, policies and guidance related to the brands. Further, it will work together with all the member firms leadership, industries, functions on promoting brand addition eminence building. It has been stated to be more of guidance and advisory and not providing any intellectual property. Thus, 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.

Insofar as 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

Lastly, 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 above service is purely for internal purpose and not for any commercial exploitation, nor any scientific equipment is given to the appellants by Holdings. Global network acquires certain technology products from vendors and provides them to the member firms and also provides security advice to all the member firms for which it also develops certain database, systems and websites that is used by all the members of the network. 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.

Before us, the judgment of Hon'ble Delhi High Court in the case of EY Global Services Ltd. v. ACIT, 441 ITR 54 (Del.) has been relied upon, wherein on the issue of whether EY Global Services Ltd., which was a Limited Liability Company engaged in providing technology and other support services

Common standards and policies

1Assisting in the development of Common Standards and Policies, including accounting policies, practices, principles and procedures. 1.2When considered appropriate by EYG Services, providing practice manuals and other reference materials and otherwise assisting in the adoption and consistent application of Common Standards and Policies.

IT Services

1Promoting the adoption, maintenance and development of high quality, common information technology and communication systems by Member Firms and providing advice and assistance in connection with the systems of Member Firms including where considered appropriate, developing or assisting in the development of such systems or any part of them.

2. Procuring for the Member Firms external software licences for their internal business use.

3. Coordinating and promoting a globally consistence policy with regard to technology infrastructure with the objective of delivering economies of scale for the Member Firms and avoiding duplicative systems or structures across the network.

Knowledge

1Promoting and establishing global websites (both internet and intranet), establishing projects to capture and disseminate global

In the present case, the EYGBS (India), in terms of the Service Agreement and the MOU, merely receives the right to use the software procured by the EYGSL (UK) from third-party vendors. The consideration paid for the use of the same therefore, cannot be termed as “royalty” as held by the Supreme Court in Engineering Analysis Centre (supra). In determining the same, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is the Agreement between the EYGSL (UK) and the EYGBS (India). As the same does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term “royalty” as held by the Supreme Court in Engineering Analysis Centre (supra). 15. We may also note that the learned AAR in its Impugned Order has relied upon its earlier view in Citrix Systems Asia Pacific Pty Ltd., In Re., (2012) 343 ITR 1 (AAR), which has been expressly stated to be bad law in Engineering Analysis Centre (supra).”

Further, the Delhi Bench of Tribunal in the case of EY Global Services Ltd. vs ACIT in ITA No. 7017/Del/2019 wherein almost similar facts were there, which have been discussed in para 4 as under :-

Here, in this case also, the Assessing Officer 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. Thus, we hold that the payments made to Holdings is not taxable as Royalty under Article 13(3) of the India-UK DTAA.

Insofar as pleading relating to principle of mutuality for which reliance was placed on the decision of Delhi bench of Tribunal in the case of Deloitte Touche Tohmatsu under an arrangement which was similar to the one in the present appeals, we are not going into this aspect, firstly, because, in our opinion, principle of mutuality cannot be examined in proceedings u/s 195; and secondly, principle of mutuality has to be seen qua in the hands of the recipient, i.e. entity which is receiving the payment and not in the hands of the payer, which is the appellant here. Therefore, we are not entering into the issue of mutuality in this case.

Lastly, insofar as issue of reimbursement is concerned, the same has become purely academic once we have held that the payments made are not in the nature of Royalty and is not taxable.

Accordingly, we hold that 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.

Respectfully following the aforesaid decisions, and even otherwise on an independent appreciation of the material on record, we find no reason to take a different view. The services comprised under Global Brand essentially involve formulation and implementation of global brand strategy, dissemination of common policies, training modules and internal guidance to ensure consistency and uniformity across member firms. These activities do not involve any transfer of trademark, patent, design or other intellectual property rights, nor do they confer upon the assessee any right of commercial exploitation independent of the global network. The payments are clearly for facilitative and coordinative services rendered within the network.

Likewise, the Global Communications services relate to internal and external communications, publications, thought leadership initiatives, media guidance, and alignment of messaging across the Deloitte network. These services are in the nature of managerial and advisory support and cannot, by any stretch of interpretation, be equated with imparting information concerning commercial experience of the kind contemplated in Article 13(3). There is neither transfer of any ITA No.4653/Mum/2025 and others Deloitte Haskin & Sells LLP

As regards Global Technology / Knowledge Management, the record clearly establishes that the global entity procures software and technology tools from third-party vendors and makes them available to member firms strictly for internal business use. The assessee does not acquire any right to exploit, sub-license or commercially deploy such software. What is made available is merely a copyrighted article and not the copyright itself. The legal position in this regard now stands conclusively settled by the judgment of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence (P) Ltd., which has been consistently followed in the assessee’s own case by this Tribunal.

The reliance placed by the Assessing Officer on the ruling of the Authority for Advance Rulings in the case of EY Global Services Ltd. is also misplaced, as the said ruling has since been set aside by the Hon’ble Delhi High Court, and the very foundation of the Assessing Officer’s reasoning no longer survives. Once the underlying legal premise has been rendered untenable, the conclusions drawn therefrom cannot be sustained.

We also find merit in the submission that the expression “information concerning industrial, commercial or scientific experience” cannot be expansively construed to include

In view of the aforesaid discussion, and respectfully following the binding precedents rendered by coordinate benches of this Tribunal in the assessee’s own case on identical facts, we hold that the payments made by the assessee to Deloitte Global Holdings Services Limited under the heads of Global Brand, Global Communications and Global Technology / Knowledge Management do not fall within the scope of “royalty” as defined in Article 13(3) of the India–UK DTAA. Consequently, such payments are not chargeable to tax in India and no obligation to deduct tax at source under section 195 arises therefrom.

Accordingly, finding no infirmity in the order of the learned Commissioner (Appeals), and being in respectful concurrence with the view consistently taken by this Tribunal in the assessee’s own case, we uphold the same. All the appeals filed by the Revenue are dismissed.