DCIT (IT)-2(1)(2),MUMBAI, MUMBAI vs. DELOITTE TOUCHE TOHMATSU INDIA LLP, UK

The facts in brief and the background qua the issue involved are that the appellants, Deloitte Touche Tohmatsu India LLP (“DTTI”) and Deloitte Haskins & Sells LLP (“DHS”) are limited liability partnership firms rendering professional services to large domestic as well as multinational corporations and are part of Deloitte network worldwide. DTTL, also known as “Global Network” of various member firms, is incorporated in, and a tax resident of, the United Kingdom and it do not per se carry out any income earning activity and has no stream of income. It has been stated before us that, Deloitte Global Holding Services Ltd. ("Holdings") is a company limited by guarantee organized and existing under the laws of England and Wales. Deloitte Global Holdings is a special purpose vehicle created by Global Network to facilitate the attainment of objectives, inter alia, to further international alignment, cooperation, cohesion and professional standards of the highest quality among its Member Firms (such as DTTI). Deloitte Global Holdings performs various activities for the common benefit of its members. Articles of Association of Deloitte Global Holdings do not permit it to perform & 4517/Mum/2024 Deloitte Touche Tohmatsu India LLP & Anr any services for third party clients. As per Article 15 of the Articles of Association, Holdings is not permitted to distribute dividends or any other amounts to its members except on winding up in proportion of their contributions. While there may be a surplus/ deficit in a particular year due to over/under recovery of expenses, Holdings is intended to break-even over time. Deloitte Global Holdings incurs expenses in the course of carrying out the above activities for the benefit of all members, which are recovered from members without any mark-up. The terms on which the activities are carried out by Holdings and expenses are recovered by it from its members are embodied in an agreement named as "Shared Services Agreement" entered into by the member firms with Holdings vide agreement dated 1 August 2011 between DTTI and Holdings. The relevant recitals to the agreement (copy appearing at page 521 of the paper book) state that:  DTTI is a member of Holdings and DTTL whose purpose is, among other things, to further international alignment, cooperation, cohesion and professional standards of the highest quality among its Member Firms and their Affiliates.  Deloitte Services has been established with a view to facilitating fulfilment of those purposes and Deloitte Services intends to provide certain services to its members (including Holdings).  Holdings has also been established with a view to facilitating fulfilment of those purposes and Holdings intends to receive certain Services from Deloitte Services and supply the same to its Holding Members (including DTTI).  Under para 2.A.2 parties acknowledge that Holdings does not have capacity to provide such services and shall, instead, outsource these services to Deloitte Services. Deloitte Services shall make available such services to Holding Members (DTTI).  Para 3.C states that the parties acknowledge that Holdings will generally be run on a break-even basis. 3.1 The services provided under the Shared Service Agreement are enumerated at pages 540 to 543 of the paper book. In short, these are: 1. 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 Assessing Officer while deciding the application filed by the appellants for the Assessment Years 2018-19 and 2019-20 held that payments to the extent they were relatable to, (1) Global brand; (2) Global Communications; and (3) Global Technology/Knowledge Management, were in the nature of royalties, being payments for use of computer software/literary work. Assessing Officer relied on the following decisions in support of his view and, in particular, AO has heavily relied on the decision of the AAR in the case of EY Global Services Ltd. AAR No. 1043 of 2011. ⚫ CIT vs Synopsis International Old Ltd (2012) 28 taxmann.com 162 (Kar) ⚫ Shell India Markets (P) Ltd. In re (AAR) (342 ITR 223) ⚫ Gartner Ireland Ltd. (37 taxmann.com 16) (Mum ITAT) ⚫ CIT v. Wipro Ltd. (203 taxman 621/16 taxmann.com 275) (Kar) ⚫ TNT Express Worldwide (UK) Ltd. (70 taxmann.com 129) (Bang. ITAT) Accordingly, Assessing Officer (for instance in appeal of 2019 for A.Y. 2018-19) held that the payments were liable for deduction of tax at source and worked out the withholding tax liability by applying a proportion of 3/10 to the total remittance of Rs. 95,49,00,000/-, since 3 out of 10 services were held by him to be in the nature of royalty. Accordingly, the Assessing Officer authorised the remittances after deduction of tax @ 3% on the overall remittances made by appellants to Holdings.

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 : “12. Comparing Article 11(3) of Double Taxation Avoidance Agreement with the detailed breakup reproduced above form basis for decision. Article 11(3) has several parts and we have to focus whether the payment is for information concerned commercial experience [later part of Article 11(3)(a)] or right to use, any copyright of a literary, artistic or scientific work [initial part of Article 11(3)(a)]. A plain reading of the break up of & 4517/Mum/2024 Deloitte Touche Tohmatsu India LLP & Anr each expenses, worst come worst, vis-a-vis multiple aspects in Article 11(3) of Double Taxation Avoidance Agreement, leads to the fact that the payment is for information concerned commercial experience.” 5.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 decision can be on basis of description provided in the agreement between appellant and Deloitte Global Services Holding Ltd. The appellant submitted that the payment is not for right to use any copyright of literary, artistic or scientific work. The submission of the appellant is not explicit on whether the payment is for information on commercial experience under Article 11(3)(a). It is stated to be for internal purpose and not for commercial exploration. Aspect regarding Article 11(3)(b) is not relevant in the context of this case. Reading the submission of appellant along with the details available in the agreement, I find that each of the items falls within information on commercial experience and hence Article 11(3)(a) applies.

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 : A. Firm and Holdings acknowledge that all Services Firms will be parties to a Shared Services Agreement pursuant to which they will receive, directly or indirectly, Services from Deloitte Services. Clause 5A also talks about providing services and clause 4 also deals with fees related to services. In clause 4, it is seen that the aspect of subsequent recovery is mentioned. Even considering this, as such the payment is for services rendered.

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 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.

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 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 & 4517/Mum/2024 Deloitte Touche Tohmatsu India LLP & Anr 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 :- “3. For the purposes of this Article, the term “royalties” means : (a) Payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) Payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.”

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 & 4517/Mum/2024 Deloitte Touche Tohmatsu India LLP & Anr 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 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.

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 nonprofit central service provider to & 4517/Mum/2024 Deloitte Touche Tohmatsu India LLP & Anr 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").” The Tribunal had followed the aforesaid judgment of Hon'ble Delhi High Court wherein the judgment of AAR in the case of EY Global Services Ltd. has been reversed.

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.