By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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(i) As accreditation fee was not ‘royalties’ under Article 12(3) of DTAA, in absence of PE in India, was not chargeable to tax in India.
(ii) Obligation to withhold tax u/s.195(1) arises only if the payment is chargeable to tax in India.
Facts:
The taxpayer was an Indian company engaged in the business of manufacturing and trading of tooth powder, tooth paste, tooth brush and other health care products.
BDHF is a UK-based registered charitable institution. Based on study made by an independent panel of internationally recognised dental experts, BDHF evaluates consumer oral health care products to ensure that manufacturers’ product claims are clinically proven and not exaggerated. As a result of accreditation granted by BDHF, the manufacturer is allowed to mention this fact while marketing the products. The taxpayer had paid certain amount as accreditation fee to BDHF. The AO noticed that the taxpayer had not withheld tax from the payment made to BDHF.
The taxpayer submitted that as the recipient of income was not liable to be taxed on this income in India, tax was not required to be withheld by the taxpayer. Further, the disallowance u/s.40(a)(i) can only be made when taxes are deductible but not deducted. The AO, however, held that u/s.195 of the Income-tax Act, tax must be withheld at the time of remittance and since the taxpayer had not submitted any certificate about non-taxability of the amount, he disallowed the entire payment u/s.40(a)(i).
In appeal, the CIT(A) held that: the fee could not be treated as ‘royalties’; BDHF did not have any PE in India; consequently, the payment made to BDHF could not be taxed in India; and in absence of any tax liability on the payment, the taxpayer had no obligation to withhold tax from the payment. Therefore, he deleted the disallowance u/s.40(a)(i).
Held:
The Tribunal observed and held as follows.
(i) The expression ‘royalties’ is defined in Article 13(3) of India-UK DTAA and the payment was not covered within the definition. While it was in the nature of ‘business profits’, BDHF did not have PE in India. Hence, it was not taxable in India. Even if in normal business parlance, it could be termed ‘royalty’, it cannot be so classified if it does not fall within the definition in India-UK DTAA.
(ii) In terms of the Supreme Court’s decision in GE India Technology Centre Pvt. Ltd. v. CIT, (2010) 327 ITR 456 (SC), tax deduction u/s.195(1) arises only if the payment is chargeable to tax. The AO has to establish that the nonresident was chargeable to tax. Since BDHF was not liable to tax on fee, the taxpayer had no obligation to withhold tax.
