DCIT(IT)-2(1)-2, MUMBAI, MUMBAI vs. DELOITTE HASKINS & SELLS LLP, MUMBAI

The ld. CIT (A) following the decision of the Tribunal in assessee’s own case for A.Y.2018-19 and 2019-20 vide order dated 27/07/2022 held that payments made to Deloitte Global Services Pvt. Ltd., do not fall in the scope and definition of ‘royalty’ under Article 13(1) of India UK DTAA and consequently, assessee was not required to deduct tax while making the payment to DGSHL.

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 provision of copyright in computer software or any literary work as no right to use copyright is given by Holdings to the appellants. He further Deloitte Haskins & Sells LLP pointed out that before the Assessing Officer it was explained in detail vide letter dated 08.01.2018 as to how the payments cannot be regarded as Royalty, however, the Assessing Officer has simply referred to certain decisions (cited supra) and held them to be in the nature of Royalty.

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 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 of services cannot be regarded as provision of information concerning commercial experience. The information utilised/provided in the course of rendering these services is not of confidential or secret in nature but is published information available in public domain. Therefore, such a payment cannot be regarded as consideration for imparting of any information Deloitte Haskins & Sells LLP concerning commercial or knowledge, experience or skill as contemplated in the definition of royalty as contained in clause (iv) of Explanation 2 to section 9(1)(vi) or under article 11(3)(a) of the India-UK tax treaty. In support of his contention, he relied upon the following decisions : “a. CIT vs. HEG Ltd. 263 ITR 230 (MP) In this case, the assessee had paid certain amounts to a USA company for purchase of some information. The transaction was held by the AO to involve imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill and, therefore, the payment was held to be royalty. The Tribunal held that there was nothing secret or confidential in the booklet which was supplied to the assessee in the form of information for the benefit of the assessee and that the correspondence between the assessee and the firm was only information in the form of collection of data on the subject available in the market and, therefore, the payment was not in the nature of royalty. The High Court held that any information cannot earn the status of royalty and that to have the status of royalty, the information must have some special feature. Some sort of expertise or skill is required. The matter was ultimately remitted to the Tribunal for carrying out factual verification as to whether the information in question was available in public domain. It is submitted that in the present case there is no imparting of information at all, only services are rendered and, in any event, there is no imparting of any confidential data or information. Therefore, the payments cannot be regarded as royalty. b. Marck Biosciences Ltd. vs. ITO 164 ITD 205 (Ahd) The assessee made payments to a US company on account of professional fee for global biopharmaceutical strategic counselling and advisory services rendered by this entity. The AO took the view that the services were covered by the definition of royalty since rendition of services by the US entity amounted to parting with the "information concerning industrial, commercial and scientific experience" gained by the US entity over a period of time. The Tribunal held that the services included (a) business promotion (b) marketing (c) publicity and (d) financial advisory, which were termed as 'Strategic and Financial Counselling Services'. Therefore, it was held that the payments were for rendition of these services and not for use of any information concerning industrial, commercial or scientific experience. It is submitted that in the present case also the payments are made for the services rendered by Holdings / Deloitte Services and, therefore, they cannot be regarded as consideration for imparting any information concerning industrial, commercial or scientific experience. c. Factset Research Systems Inc. In re 317 ITR 169 (AAR)

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 Haskins & Sells LLP 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. CIT(A). He submitted that, in fact, the payments in question are for information concerning commercial experience.

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. 12.1 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.

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 Deloitte Haskins & Sells LLP 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 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.

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 Deloitte Haskins & Sells LLP 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 and software licences to member firms of EY Network in various countries all over the world and all the member firms using the brand Ernst & Young (E&Y) had entered into contract with various third party vendors for procurement of software to be used by member firms. There also, the services which was rendered by Ernst & Young UK and the Memorandum of Understanding executed between itself and EYGBS India were as under : “4. The specific services mentioned in the services schedule annexed to the MOU, which are rendered by the Applicant under the service agreement and the Memorandum of Understanding between the Applicant and EYGBS India are as follows: 1. Common standards and policies 1.1 Assisting in the development of Common Standards and Policies, including accounting policies, practices, principles and procedures.

IT Services 2.1 Promoting 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. 2.2 Procuring for the Member Firms external software licences for their internal business use. 2.3 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 3.1 Promoting and establishing global websites (both internet and intranet), establishing projects to capture and disseminate global knowledge and developing or facilitating the development of methodology and techniques which further enhance the knowledge sharing capacity of Member Firms.” The Authority for Advance Ruling held the consideration received in respect of computer software deliverables as Royalty. The Hon'ble Delhi High Court, following the ratio of the principles laid down in the judgment of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (supra) observed and held as under :- “13. A reading of the above judgment would clearly show that for the payment received by EYGSL (UK) from EYGBS (India) to be taxed as “royalty”, it is essential to show a transfer of copyright in the software to do any of the acts mentioned in Section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licencee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end-user to have access to Deloitte Haskins & Sells LLP and make use of the licenced software over which the licencee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as “royalty”.

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).

Further, the Delhi Bench of Tribunal in the case of EY Global Services Ltd. vs ACIT in wherein almost similar facts were there, which have been discussed in para 4 as under :- “4. Brief facts of the case are that EY Global Services Limited (hereinafter referred to as 'the assessee') is providing technology and other support services and software licenses to the member firms of the EY Network. The assessee is said to be established as a non- profit central service provider to enable EY member firms to share the costs of centralized services. Accordingly, the assessee enters into agreements with each member firm, pursuant to which it provides services required by member firms and thereafter, recovered various costs incurred by it from the member firms on actual usage basis. Given the above, the assessee filed a 'NIL' return of income on 30th March 2012 contending that the payments received by the assessee from Indian member firms are mere reimbursement of costs and not taxable under the Act as well as the Double Taxation Avoidance Agreement between India and United Kingdom (hereinafter referred as "the treaty").”

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.

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.

In the result, all the appeals of the assessees are allowed.”