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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI D. MANMOHAN & SHRI B. RAMAKOTAIAH
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-5, Hyderabad, dated 28-12-2016, on the issue of treating a payment of Rs. 12,44,072/- ($35,000) to M/s. Balanced Scorecard Collaborative inc. of USA, towards application fee.
Briefly stated, assessee is a company. It has filed return of income for the AY. 2006-07 on 27-11-2006 declaring Rs. 3,19,150/- as income. The assessment u/s. 143(3) of the
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Income Tax Act [Act] was completed on 26-12-2008 determining the total income at Rs. 7,99,530/-. The CIT-1, Hyderabad passed an order u/s. 263 of the Act dt. 15-11-2010 directing to re-do the assessment after examining the issue relating to allowability of expenditure claimed on account of license fee for an amount of Rs. 12,44,072/-. During the FY. 2005-06, assessee entered into an agreement with M/s. Balanced Scorecard Collaborative Inc. of USA for the purpose of its consultancy business and accordingly paid a sum of Rs. 12,44,072/- as fee. AO held that the fee paid as royalty within the meaning of clause (vi)(b) of Sub-section (1) of Section 9 of the Act and disallowed the amount of Rs. 12,44,072/- u/s. 40(a)(ia) of the Act on the ground that no TDS has not been deducted.
Before the Ld.CIT(A) it was contended that the amount paid by the assessee to M/s. Balanced Scorecard Collaborative Inc. USA is an affiliate fee. The same is evident from second clause-Annual Fee under the Key Provisions. This is reproduced from the agreement between the assessee and M/s. Balanced Scorecard Collaborative Inc.
"Annual Fee. Within (14) days of the signing of this Agreement, and upon each anniversary of such signing, the Affiliate shall pay BSCol an affiliate fee of $US 35,000. Upon completion of the first year of the Agreement, BSCol reserves the right to increase the annual fee based on changing economic conditions or changes in the level of involvement needed to support the relationship. Notification of any annual fee increases will be made at least (90) days prior to payment due date."
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According to the said clause assessee is to pay an amount of US $ 35,000 towards affiliate fee. This amount is not in connection with use of any right to use any material or service provided by the nonresident. As there is no income accruing in India to M/s. Balanced Scorecard Collaborative Inc. on the membership fees paid, no TDS need to be deducted.
3.1. Contending further, assessee submitted to Ld.CIT(A) that AO is of false notion that the said payment Rs. 12,44,072/- would fall under meaning of royalty under the Explanation 2 to section 9(l)(vi) of the Act. The aforesaid payment is towards affiliate fees. As per the Concise Oxford Dictionary ninth edition affiliate means "to attach or connect with a larger organization", In this case, Affiliate fees refer to fee paid towards association with M/s. Balanced Scorecard Collaborative Inc. As such there is no income accruing to the non-resident in India. This fee paid is not towards:
• Transfer of any rights • Imparting of any information, • Use of any patent, invention, design, model, secret formula • Imparting of any information concerning technical, industrial, commercial, scientific knowledge, experience, skill • The use or the right to use any industrial, commercial or scientific equipment • Transfer of all or any rights in respect of copyright, literary, artistic or scientific works.
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As the affiliate fee paid is not in the nature of Royalty and does not fall as referred by the AO in his order to the explanation 2 to sec 9(1) of the Act. Further it does not fall under the meaning of Royalty as defined in Article 12(3) in DTAA between India and USA which is reproduced as under:
The term "royalties" as used in this Article means:
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or mode, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; 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 payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. It is clear from the above explanations that the payment made by assessee to M/s. Balanced Scorecard Collaborative Inc. does not fall under the meaning of Royalty
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either under 9(1)(vi) or under the meaning of Royalty as defined under Article 12(3) in DTAA between India and USA.
3.2. It was further submitted that as held by Hon'ble Supreme Court in the case of GE India Technology Centre (P.) Ltd Vs. CIT [2010] [327 ITR 456] / 193 Taxman 234, tax deduction at source obligations under section 195(1) arise only if the payment is chargeable to tax in the hands of nonresident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. Tax withholding liability of the payee is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, the AO cannot proceed on the basis that the prayer had an obligation to deduct tax at source. He still has to demonstrate and establish that the payee has a tax liability in respect of the income embedded in the impugned payment.
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That exercise was not carried out by AO on the facts of this case. The AO was thus clearly in error in proceeding to invoke disallowance under section 40(a)(i) on the short ground that the assessee did not deduct tax at source from the foreign remittance.
Ld.CIT(A), however, extracted some of the clauses of the agreement and after detailed discussion held that the payment is in nature of royalty under the Income Tax Act and DTAA as well.
Contending the above order, assessee has raised grounds and additional grounds and placed paper book on record.
Ld. Counsel referring to the submissions made before authorities and magazines placed in the paper book submitted that the assessee has paid an affiliation fee only and not any further payments towards consultancy and technical know-how. What the assessee got in return was a few published magazines and had not paid any royalty or technical know-how fee or any further fee, the terms of which Ld.CIT(A) relied on. While agreeing that the theoretical analysis of Ld.CIT(A) is correct, it was submitted that it was devoid of any facts. It was submitted that assessee intended to collaborate in training/ consultancy services and obtained only affiliation but there was no parting of information, provision of services and use of technical know-how etc., so as to be covered by the
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provisions of DTAA or IT Act. It was further submitted that there was no PE to the non-resident and the income of Harvard affiliate was not taxable in India. Ld. Counsel relied on the following cases:
i. Judgment of Hon'ble High Court of Delhi in the case of DIT Vs. Sheraton International Inc [313 ITR 267]; ii. Order of the ITAT, Delhi in the case of Hughes Escort Communications Ltd., [51 SOT 356] (Del); iii. Decision of AAR in Regents of the University of California UCLA Anderson School of Management Executive Education, USA; iv. Judgment of Hon'ble Supreme Court in the case of Tata Consultancy Services Vs. State of Andhra Pradesh [271 ITR 401]; v. Judgment of Hon'ble High Court of Delhi in DIT Vs. Ericsson A.B [343 ITR 470]; vi. Judgment of the Hon'ble High Court of Madras dt. 04-01- 2017 in the case of CIT Vs. M/s. Vinzas Solutions India Pvt. Ltd., in Tax Case Appeal No. 861/2016; vii. Judgment of Hon'ble Supreme Court in the case of GE India Technology Centre (P) Ltd., Vs. CIT & Anr [327 ITR 456];
Ld.DR reiterated the argument of the AO and CIT(A) to submit that the payment is for use of process and for imparting information as defined in Explanation-2 to Section 9(1)(vi) defining Royalty.
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We have considered the rival contentions and perused the orders of the authorities. We have also considered the submissions of assessee and perused the paper book placed on record. The agreement dt. 31-03-2005 between the assessee and M/s. Balanced Scorecard Collaborative inc. of USA (unit of Harvard Business School, USA), specifies various terms and conditions and the relationship, vision philosophy which the Ld.CIT(A) has painstakingly considered and extracted in the order to indicate that there is arrangement for use of technical knowledge. However, as seen from the agreement itself, there are two types of payments. The affiliation fee is one-time payment which does not provide for transfer of any technology. On signing the agreement, the affiliate shall play an affiliate fee of US $ 35,000. This fee being annual fee is subject to increase or decrease on changing economic conditions. The annual fee does not provide for any transfer of technology. However, there is further fee to be paid “Fees on consulting and reports” in para 4 of the agreement. This fee will be paid based on the performance, targets achieved by assessee in consulting technology, tools etc. What assessee has paid and claimed was only an affiliation fee and not the fee on consulting and reports. Since the payment of affiliation fee does not involve any transfer of technical knowledge or use of technical knowledge, the entire case law relied upon by the Ld.CIT(A)/AO does not apply to the facts of the case.
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8.1. As seen from the paper book placed on record, what assessee got is in the form of two magazines which are published by the Harvard Business School with a title ‘Balanced Scorecard Report’. This magazine, short of management jargon, is nothing but a periodical magazine with various write- ups, which cannot be considered as a right to use a copy right. Assessee being management consultant, the agreement with M/s. Balanced Scorecard Collaborative inc. of USA, had this high sounding management terminology, but put it simply assessee has paid only the affiliation fee and not a fee for consultation or for technical knowledge. Since there is no transfer of technical know-how or technical knowledge or use of technical knowledge, in our opinion, the definition ‘royalty’ either under IT Act or under the DTAA does not apply to the present payment of affiliation fee. Since the M/s. Balanced Scorecard Collaborative inc. of USA, does not have any PE in India, the payment itself per se does not attract any TDS provisions.
8.2. The Co-ordinate Bench in the case of Hughes Escort Communications Ltd., [51 SOT 356] (Del) has considered the similar affiliate agreement to hold that payments remitted was not royalty. The facts in that case are that assessee has entered into agreement with eCornell, wherein eCornell is to impart education to the students in India through the medium of internet which involves making available to its students Login ID and therefore, grant access to course material respond to queries, conduct exams and
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grants certificates etc., for which purposes, eCornell enters into a separate agreement [individual agreement] with the students directly. Assessee was undertaken to perform role of marketing courses, assist the registration process and collect combined fees etc,. On the facts, it was held:
“On a careful perusal of the above it is seen that the nature of payment made to eCornell is not 'royalty' as the payment is not for the use or the right to use any copyright or literary work. The fact that it is not for artistic, scientific work, work on film, tape, radio, television, broadcasting etc. does not arise. It is also not for use or right to use patent, trademark, design, plan, secret formula or process etc. It is purely and simply a case of pooling of resources by way of an affiliate agreement wherein the respective roles and responsibilities have been assigned and the arrangement being of the nature of pooling of resources where fee sharing of the two parties have been set out this is not a case where any payment is being made to eCornell by the assessee for any kind of service as it is purely a case of apportioning of fees attributable to eCornell as per the affiliate agreement being remitted to eCornell and the portion of the fees collected for providing enrolment infrastructure in order to access the study material by the students was retained by the assessee as its share. As such on facts the present case does not partake the nature of royalty as contemplated under clause 3(a) of article 12 of the Indo-US DTAA. [Paras 8.12 and 8.13] Thus, the remittances made to eCornell (TILS) do not fall in the category of royalty as considered in clause 3(a) of article 12 of the Indo-US DTAA. [Para 9.6]”
8.3. Since the payment of affiliation fee alone do not result in either providing any technical service or use of technical knowledge, we are of the opinion that both the AO and CIT(A) have erred in considering the fee as in the nature of royalty. Since there is no transfer of technology or use of any technology and payment is only simply for affiliation, the above amount cannot be considered as ‘royalty’ either under the
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provisions of Income Tax Act or under the provisions of DTAA. The respective provisions are extracted in detail in the submissions of assessee before the CIT(A) stated above as well. We do not intend to repeat the same for the sake of brevity. Suffice to say that the affiliation fee cannot be considered as taxable income of non-resident so as to attract TDS provisions. Therefore, the disallowance u/s. 40(a)(ia) of the Act does not arise on the facts of the case. AO is directed to allow the amount.
In the result, the appeal of assessee is allowed.
Order pronounced in the open court on 4th July, 2018
Sd/- Sd/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER Hyderabad, Dated 4th July, 2018 TNMM
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Copy to : 1. Customer Lab Solutions Pvt. Ltd., Hyderabad. C/o. S. Parthasarathi, Advocate, 3/1, Pranava Complex, 5th Cross, Malleswaram, Bangalore. 2. The Income Tax Officer, Ward-1(2), Hyderabad.
CIT(Appeals)-5, Hyderabad.
Pr.CIT-1, Hyderabad.
D.R. ITAT, Hyderabad.
Guard File.