25. [2018] 95 taxmann.com 280 (Hyderabad – Trib) Customer Lab Solutions (P) Ltd vs. ITO ITA No: 438 (Hyd.) of 2017 A.Y.: 2006-07 Date of Order: 4th July, 2018 Article 12 of India-USA DTAA; Section 9 of the Act – as there was no transfer of technical know-how or use of technical knowledge, affiliation fee paid by an Indian Company to an American Company was not royalty, either under the Act or under India-USA DTAA.

Facts

The Taxpayer was an Indian Company.
During the relevant year, the Taxpayer entered into an agreement with an
American Company (“USCo”) in connection with its consultancy business. The
Taxpayer paid fee under the agreement and claimed deduction of the same as
license fee. According to the Taxpayer, the payment was affiliation fee and had
no connection to use of any right for use of any material or service supplied
by US Co. Since no income accrued to USCo in India, no tax was required to be
withheld in India.

The AO held that the fee was
royalty u/s. 9(1)(vi)(b) of the Act and disallowed the payment u/s. 40(a)(i)
since the Taxpayer had not withheld tax.

The CIT(A) held that the payment
was royalty under the Act as well as India-USA DTAA. 

Held

•     The agreement provided
  for two kinds of fee. One was an annual affiliation fee. The affiliation fee
  did not provide for any transfer of technology. The other was “fees on
  consulting and reports”. It provided for payment to be made based on
  performance and achievement of targets.

•     The claim of the Taxpayer
  was only in respect of the affiliation fee and not consulting fee. In
  consideration of the payment towards affiliation fee, the taxpayer received
  only a periodical magazine having various articles. This could not be
  considered right to use copyright.

•     Accordingly, as there was
  no transfer of technical know-how or use of technical knowledge, the
  affiliation fee could not be considered as royalty, either under the Act or
  under India-USA DTAA. This view is also supported by the decision in Hughes
  Escort Communications Ltd vs. DCIT [2012] 51 SOT 356 (Delhi).

•     Since USCo did not have
  any PE in India, Tax was not required to be withheld in India.