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Facts
The assessee made foreign remittances for testing charges and management fees to its parent company without deducting TDS. The AO held these payments to be Fees for Technical Services (FTS) or royalty, making the assessee liable for default under Section 201(1)/201(1A). The CIT(A) upheld the AO's order.
Held
The Tribunal found that the issue of whether the payments were subcontracting charges or testing charges, and their nature (FTS or royalty), required further examination of documentary evidence. The issue of taxability of management fees also needed fresh examination as the alternate plea of reimbursement of global costs was not properly dealt with.
Key Issues
Whether testing charges and management fees paid to a foreign parent company are taxable in India as FTS or royalty. Whether the assessee is in default for not deducting TDS on such payments.
Sections Cited
195, 201(1), 201(1A), 143(3), 250, 9(1)(vii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C’’ BENCH: BANGALORE
Before: SHRI WASEEM AHMED & SHRI PRAKASH CHAND YADAV
PER PRAKASH CHAND YADAV, JUDICIAL MEMBER:
1. These appeals are related to three different assessees and one cross appeal by the revenue, which are arising out of the orders of ld. CIT(A), Bangalore as follows:
Appeal No. AY CIT(A) order DIN dated IT(IT)A 2012-13 31.10.2023 ITBA/APL/S/250/2023- No.1135/Bang/2023 24/157557319(1) ITA 2012-13 31.10.2023 ITBA/APL/S/250/2023- No.1136/Bang/2023 24/1057559792(1)
2012-13 31.10.2023 ITBA/APL/S/250/2023- (Revenue appeal) 24/1057559792(1) IT(IT)A 2012-13 31.10.2023 ITBA/APL/S/250/2023- No.1158/Bang/2023 24/1057558466(1)
Since the issue in all these appeals is common, for the sake of convenience, we are deciding these appeals by way of this consolidated order.
(AY 2012-13) ( lead matter): 3. We take the appeal in for the AY 2012-13 as base appeal for adjudicating the common issue emerging in all these appeals and hence, reproduce the grounds raised by the assessee in this appeal as follows:
The Order dated 31 October 2023 passed under section 250 by the Learned Commissioner of Income tax (Appeals) ('CIT(A)') for the subject AY is bad in law and on facts.
2. The Learned CIT(A) erred in upholding the view of Assistant of Income-tax, International taxation Circle — 2(2), Bengaluru ('Learned AO') that the payments towards testing charges and management fees, to the non-resident group entities ('Payees') fall under the ambit of Fees for Technical Services/Fees for Included Services ('FTS/FIS') as per the Double Tax Avoidance Agreement of India with the respective tax jurisdictions of the Payees ('Tax treaties').
The Learned AO & CIT(A) has erred in treating the Appellant as 'an assessee in default' within the section 201(1)/ 201(1A) of the Act and consequently erred in raising a tax demand.
Non-deduction of withholding taxes on payment of testing charges
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 4 of 15 4. The Learned AO & CIT(A) have erred in not appreciating that section 195 of the Act requires withholding of taxes only if the payments are liable to tax in India.
5. The Learned AO & CIT(A) have erred in concluding that the payments towards testing charges constitutes FTS/FIS despite the fact that testing services provided by the payees do not make available any technical knowledge, experience, skills or know how as required by the relevant Tax Treaties for the payment to qualify as FTS/FIS.
6. The Learned AO has erred by making references and relying on various judicial precedents, which are not applicable to the facts of the Appellant, to conclude that the payments qualify as FTS/FIS under the relevant Tax Treaties. Further, the Learned AO & CIT(A) have failed to appreciate that the Appellant has borrowed principles from various judicial precedents which have similar factual matrix and instead disregarded them on the basis that the facts are completely different.
7. The Learned AO's & CIT(A)'s interpretation of what falls under the ambit of FTS/ FIS and what does not is arbitrary without appreciating the facts of Appellant's case.
The Learned AO & CIT(A) have failed to appreciate that the Payees only provide the final result of the testing services to the Appellant and does not provide any suggestions, details or the methodology of testing services to the Appellant.
9. The Learned AO & CIT(A) have failed to appreciate that merely technical knowledge and experience, it does not mean that imparted or made available to Appellant. 10. The Learned CIT(A) has erred in facts and in law that the testing services are ancillary to the utilisation of the trademark and hence the same is taxable as FIS as per the India-USA DTAA. 11. The Learned AO & CIT(A) have erred in holding that the payments towards testing charges constitutes Royalty which is in nature of use or right to use a design, secret formula, patent, trade mark, invention, etc., and hence, liable to withholding tax under section 195 of the Act.
12. Notwithstanding the above, the Learned CIT(A) failed to appreciate that certain payees have taken into account such amount for computing income in their respective return of income and have paid taxes due on such income declared in the return of income, and accordingly the demand under section 201(1) of the Act results in double taxation and thus ought to be reduced.
Non-deduction of withholding taxes on payment 13. The Learned AO & CIT(A) have erred in contending that the payment made towards management fees is in the nature of FTS as per the India-USA tax treaty.
14. The Learned AO & CIT(A) have erred in not appreciating the fact that the services provided by Underwriters Laboratories Inc. is in the nature of administrative services provided to the Appellant and that such services do not make available any technical knowledge, experience, skills or know how as required by the India-USA tax treaty for the payment to qualify as FIS.
15. The Learned CIT(A) has erred in facts and law that as the Appellant was carrying out testing and certification services, the management services rendered by Underwriters Laboratories Inc. enabled the Appellant in performing its functions and hence such payment is taxable.
16. The Learned AO & CIT(A) have erred in appreciating the fact that even though the Appellant has benefited from the management services, it does not mean that technical knowledge or skill was made available to the Appellant, merely because the services offered involves technical knowledge and experience.
17. The Learned AO & CIT(A) have failed to appreciate that the Appellant has borrowed principles from various judicial precedents which have similar factual matrix, instead disregarded them on the basis that the facts are completely different.
Erroneous levy of interest under section 201(1A) of the Act 18. The Learned AO and CIT(A) has erred in levying interest under section 201(1A) of the Act amounting to INR 1,52,20,444 which is consequential in nature. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, fact and evidence before or at the time of hearing of this appeal.
Facts of the case emerging from the impugned order are that M/s. UL India Private Limited, the assessee, is a domestic company and is into the business of providing testing services in various areas including air, water and chemical emission testing etc. The assessee
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 6 of 15 is a subsidiary company of M/S Underwriters Laboratory Inc. (UL US). As per the data available with the AO, the assessee had made foreign remittances to its parent company under the head 'testing charges' without deducting tax at source u/s 195 of the Act. In order to ascertain the factual position, a survey was conducted u/s 133A(2A) on 31.08.2018 at the office premises of the assessee company. In the course of verification during the survey, it was found that the assessee company had been making foreign payments to its parent company (UL USA) and other related companies under various head like royalty, testing charges, management fees and training charges etc. While the royalty and training charges were subjected to TDS u/s 195 of the Income Tax Act by assessee company, no taxes were found to have been withheld u/s 195 of the Act on the testing charges and management fees paid to the foreign companies. The assessee had also not applied under section 195(2) of the Act to determine whether the testing charges paid to the vendors, were chargeable to tax under the Act. Further the recipient of the payments, UL USA had also not obtained a NIL deduction certificate on the sums receivable by it. Neither the assessee nor UL USA had sought an advance ruling on this issue. Without taking recourse to the any of the above provisions, UL India had paid the testing charges to its vendors without deduction of tax at source.
4.1 Before the AO, it was claimed by the assessee that no tax had been deducted at source u/s 195, since the impugned payment to the vendors was in the nature of fees for included services but technical knowledge, skill, etc. was not made available to the assessee in terms of the treaty provisions with USA. A notice u/s 201(1)/201(1A) of the IT Act was issued to the assessee company on 01.02.2019, initiating proceedings to treat the assessee company
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 7 of 15 as an assessee in default, for the failure to deduct taxes u/s 195 of the IT Act on the testing charges and management fees paid. After examining the agreement between the assessee and UL USA, the AO noted that the agreement and also the procedure involved in testing of samples by UL USA clearly indicated that the foreign entity was delivering services to the-assessee by providing it with the test results which was further passed on to the customers of the Indian company. In short, the technical services rendered by UL USA are utilized by the assessee company in its business operations in India. The AO therefore held the payment to be taxable as FTS under the provisions of the Act as well as the India-USA DTAA. Alternatively the AO also observed that the charges paid are taxable as royalty.
4.2 During the relevant year relevant, the assessee had also made foreign remittances under the head “Fees for management services” to the parent entity M/s. UL USA. Management is the process of planning, organizing, leading and controlling the effects of organization members and of using all other organizational resources to achieve the stated organizational goals.
4.3 The knowledge is accumulated through study, experience and experimentation. The scientific knowledge produces impersonal results and it can be empirically tested and universally applied. Therefore, the knowledge which was accumulated through study, experience and experimentation with regard to management, finance, risk, etc. of a particular business is nothing but a technical knowledge. In the era of technology transformation, the IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 8 of 15 information/experience gathered by US resident company relating to financial risk management of business is technical knowledge.
4.4 The assessee had also entered into an agreement with UL USA towards the provision of management services, which are to be used in the business activities of the assessee company, vide agreement dated 1.6.2005. The relevant portion concerning the management services agreement is reproduced as below: “UL is an independent testing certification and standards development organization. Among other services UL evaluates products components materials and system for compliance with applicable safety standards. In conducting their respective services a party may wish to procure certain services from the other party subject to the terms of this agreement.
Article 1 : Scope of services:
For conducting their respective services, a party may wish to procure certain services from the other party. The parties to this agreement are willing to provide each other certain other services as defined in this agreement subject to the terms of this agreement. These services may include but are limited to the following: e. Assess products to applicable product safety and other conformity assessment standards and requirements. f. Assess products to requirement for electromagnetic compatibility. g. Assess the results of commercial inspection and testing services. h. Assess inspections of customer manufacturing facilities and or products to determine whether relevant UL or other requirements are met or continue to be met. i. Assess management systems to relevant standards. j. Supervise work conducted by entities with which a party has contracted including review of test results submitted to a party by entities with whom it has executed memoranda of understanding.
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 9 of 15 k. Conduct advertising, marketing and promotional activity on behalf of the other party and l. Provide administrative services associated with above listed items including but not limited to technology support, legal services, human resources and financial administration e services.
8.4 As per the terms of the agreement various support services have been rendered by the US entity to the assessee company, which are utilized by the assessee company in its business activity of testing of products. The administrative services, legal services and technical support services rendered enabled the assessee company to take quick and correct decision making and successful completion of testing of customers products. Therefore, the above said services in the nature of fees for technical services were made available to the assessee company, and the same was used by the assessee company in its business activities. Therefore, the management fees payments are taxable in India both under the provisions of section 9(1)(vii) of the IT Act and Article 12(4) of the India USA DTAA.
8.5 Further for the successive assessment years, the assessee itself had deducted taxes u/s 195 of the IT Act, on the similar management fees paid to UL USA. For the AY 2012-13 alone management fees payments were not subjected to TDS u/s 195 of the IT Act.”
4.5 In the back drop of the above facts, the AO held that the payment made towards management fee charges would be in the nature of FTS and hence chargeable to tax in India.
4.6 Aggrieved with the order of AO, the assessee preferred appeal before the ld. CIT(A) and has made following submissions: a) That though the amount of testing charges was in the nature of fee for included services yet the same are not taxable in India since the service provider has not made available the technical knowledge embedded in the services rendered by the service provider. b) The similar charges have been made in subsequent assessment years i.e. in AY 2020-21 and 2021-22 under the head subcontracting charges. However, no disallowance has IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 10 of 15 been made in those years, despite the assessment has been completed u/s 143(3) of the Act. c) The ld. Counsel for the assessee also explained the scope of services received from the assessee from its parent company and contended that the scope of service was limited to the extent of testing the prototypes sent from India and there was no exchange of any technical knowledge embedded in the process of testing all these prototypes.
4.6 So far as the payment of management fees is concerned, the assessee has made following submissions before the ld. CIT(A):- a) That there was no exchange of any technical knowledge while receiving the management services. b) The services provided by the payee were in the nature of administrative services and hence there is no question of deduction of any TDS benefit on those payments. c) The payments are in fact reimbursement of global cost and hence there is no question of any withholding tax.
4.7 The ld. CIT(A) after considering the submissions of the assessee decided both the issues against the assessee on the ground that the agreement between assessee and the parent companies proves beyond doubt that there was exchange of technical knowhow between the assessee and the parent companies and therefore, the AO has rightly held that the assessee has committed default by not deducting TDS of the payments made. The ld. CIT(A) has also relied upon certain judgements for supporting his view regarding the taxability of management fees in India and decided both the issues
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 11 of 15 against the assessee. Now the assessee has come up in appeal before us.
The main plank of the argument of the ld. Counsel for the assessee is that there was no exchange of any technical knowledge knowhow process between the assessee and the service provider and hence as per the provisions of Article 12(4) of DTA between India and USA, the payments made by the assessee were not attracting any TDS liability. Ld. Counsel also drawn the attention of the bench towards the fact that in subsequent years, the department has accepted the payments made for testing charges under the name and style of sub-contracting fees has ben accepted by the revenue.
Ld. D.R. appearing on behalf of the revenue read out the order of ld. CIT(A) and laid emphasis on the terms of corporate service agreement between the assessee and the parent companies i.e. ULLC Inc. and Under Writers LLC Inc.
We have heard the rival submissions and perused the materials available on record, we have also read the synopsis filed by the assessee. Ld counsel for the assessee in order to rebut the observations of the AO has vehemently argued that the test results of the sub-contracting services provided by the non-resident entities do not enable the appellant to carry out the exact activities in India subsequently and on each occasion the appellant engages requests the non-resident entities to carry out such activities thereby demonstrating that the technical knowledge/skill is not made available to the non-resident, when the bench asked for the documentary evidences in support of this contention the counsel for the assessee admitted that such documents were not placed before
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 12 of 15 the authorities below. Considering the totality of the facts, we are of the firm view that some more facts in the light of documentary evidences are required to be examined to look into this aspect, only then a conclusion can be drawn as to whether the foreign entity has made available the knowledge to the assessee or not. It is also not coming out clearly as to whether the expenses are subcontracting charges or testing charges from the orders of authorities below. Because the legal meaning of both these terms (subcontracting charges or testing charges) carries out different meaning therefore a clarity is must on this aspect also. Therefore, we restore the matter to the file of the AO for examining a fresh in accordance with law, with a liberty to assessee to file documentary evidences in support of this issue. So far as the reliance placed by the assessee on the certificate 195 is concerned it is observed that the same is not relevant for the impugned year.
8. Next issue is that whether subcontracting charges/ testing charges are in the nature of royalty. In this regard we observe that the CIT(A) in its order has held that though appellant has paid separate royalty for the use of trade mark to its other AE, yet the testing charges are also in the nature of royalty. We are of the view that this aspect also would be examined afresh by the AO. It is the contention of the assessee that it has paid royalty charges to UL Switzerland after deducting the TDS. However, the assessee failed to elaborate as to why the testing is done by UL USA and trademark uses charges are paid to Switzerland. We observe that the customers are entitled for using the trademark charges only after the process of testing from UL USA. All these facts require fresh consideration at the end of AO. Before parting we clarify that the AO will examine the facts of the present case in the light of the judgments cited by the IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 13 of 15 assessee. The assessee has also filed some sample of the quotations, order acknowledgment copies etc., for proving the nature of transactions. The AO will examine the claim of the assessee in the light of these evidences.
The next issue in ground number 13 to 17 is the taxability of management fee. The shorts facts are already discussed elsewhere in this order. The main contention of the assesse is that the payments made are not in the nature of FTS as the service providers has not imparted the knowledge, skill know how to the assessee and the payments is mere reimbursement of the global costs which the assessee has to necessarily incurred for maintaining global standard.
Ld DR relied on the orders of the authorities below.
We have heard the rival submissions and perused the material on record the AO has recorded the findings on this issue in para 8.4 of his order and the CIT(A) has recorded his findings in Para 7.2.3. Perusal of the both the orders would show that the assessee has not raised the alternate plea that is reimbursement of global cost before the AO and the CIT(A) has not dealt the alternative plea in a judicious manner. Therefore, in the interest of justice we restore this issue also to the file of AO for examining a fresh. Assessee is also at liberty to file documentary evidence before the AO vis-à-vis alternate plea.
The findings recorded by us would apply mutatis mutandis to ITA Number 1135/Bang/2023 & 1158/Bang/2023.
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 14 of 15 of the 2024(Departmental Appeal)
The solitary issue of this appeal is regarding the taxability of software payments paid by the appellant to UL Inc. The assessing officer was of the view that the payments made by the assessee towards reimbursement of software cost are covered in the realm of royalty and therefore the assessee would have deducted the TDS on these payments.
The Ld. DR vehemently argued that the facts of the present case are different from the facts of the case of the Engineering Analysis (supra) and hence the Ld. CIT(A) is not correct in allowing the appeal of the assessee.
The Ld. Counsel for the assessee drawn the attention to page 98 of the paper book and contended that the finding of the AO that the payments were made for the use of the software are factually incorrect and in fact the payments have been made as reimbursement of expenses and therefore there is no question of deduction of any TDS.
We have heard the rival submissions and perused the materials available on record.
In the case of UL Inc. i.e. the recipient, the Ld.CIT(A) has held that reimbursement of software expenses are not taxable and the department has not filed any appeal against that order, Ld DR could not be able to controvert this aspect. Therefore, applying the rule of consistency, we are of the view that the appeal of the revenue is liable to be dismissed on this ground alone and hence
IT(IT)A No.1135/Bang/2023 UL LLC, US UL India Private Limited, Bangalore IT(IT)A No.1158/Bang/2023 Underwriters Laboratories Inc., Bangalore Page 15 of 15 the issue whether the payments made are in the nature of royalty or not become academic.
In the result, the appeals filed by the assessee are allowed for statistical purposes and the appeal filed by revenue stands dismissed.
Order pronounced in the open court on 3rd March, 2025