Payment Made By Assessee To Non-Resident Supplier Amount To "Royalty" And Liable To Deduct TDS: ITAT

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that the payment made by the assessee to the non-resident supplier would amount to royalty and there is an obligation on the part of the assessee to deduct tax at source.

The two-member bench of T.R. Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) has observed that the introduction of Explanation 5 in Section 9(1)(iv) of the Income Tax Act has enlarged the scope of the definition of "Royalty".

As per Explanation 5 in section 9(1)(iv), the royalty includes consideration in respect of any right, property or information. It is immaterial whether the possession or control of rights, property, or information is with the payer or not; whether rights, property, or information are used directly by the payer; or whether the location of rights, property, or information is in India.

The appellant/assessee is in the business of collecting market research data and conducting surveys or interviews in different countries based on project specifications provided by its clients. In consideration, it receives payments on a cost-per-interview (CPI) basis. For the purpose of preparing the questionnaire and survey design, the assessee logs into the Web Portal of NEBU, a Netherlands-based company, and utilises its survey link for the purpose. The assessee company charged its customer for the survey data, and the assessee made payments in six instalments to NEBU of the Netherlands.

The Assessing Officer determined that the services provided by NEBU of the Netherlands to its clients are royalties and fees for technical services under section 9(1)(vii). Thus, the assessee failed to withhold the tax before making payment to NEBU of the Netherlands.

The assessing officer held that, as per Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA), the consideration paid for the services rendered by the NEBU falls within the meaning of Fees for Included Services. Thus, the assessee was required to deduct tax. Thus, the A.O. charged for a short deduction of taxes and interest.

The assessee filed an appeal before CIT(A). The assessee submitted that the NEBU does not have any permanent establishment in India and furnished a copy of the agreement between the assessee and NEBU. The agreement says that the customer is given the right to use the software and related documentation.

The addition is being sustained by CIT(A) following the judgement of the Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. vs. ITO. It was held that the payment made by the Indian customers to the taxpayer for providing bandwidth/telecom services by way of the International Private Lease Circuit (IPLC) is taxable as a "royalty".

The department contended that the assessee's services were in the nature of royalty and subject to tax deducted at source in respect of payments made to NEBU of the Netherlands. Therefore, the assessing officer is correct in charging short deductions of taxes and charging interest from the assessee.

The tribunal, while dismissing the appeal of the assessee, stated that the amended provisions of Section 9(1)(vi) with Explanation 5, give a very expansive meaning to the term "Royalty" and this has a bearing on the issues, so too, the various clauses in the agreements, which are to be looked at in a holistic manner.

Case Title: Prolific Research Pvt. Ltd. Versus DCIT

Citation: ITA No. 304/Ahd/2019

Date: 31-08-2022

Counsel For Appellant: None

Counsel For Respondent: Sr. D.R V. K. Singh

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