{"id":60890,"date":"2022-11-01T12:47:35","date_gmt":"2022-11-01T07:17:35","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=60890"},"modified":"2022-11-01T12:47:37","modified_gmt":"2022-11-01T07:17:37","slug":"payment-made-to-a-non-resident-supplier-amount-to-royalty-itat-case-law","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/payment-made-to-a-non-resident-supplier-amount-to-royalty-itat-case-law\/","title":{"rendered":"Payment made to a Non-resident Supplier amount to Royalty- ITAT Case Law"},"content":{"rendered":"

The Income Tax Appellate Tribunal, Ahmedabad bench, has held that the payment by the assessee to a non-resident supplier shall amount to royalty. The bench further held that the assessee should deduct TDS under the Income Tax<\/strong><\/a> Act as provided u\/s 195. In this article, we shall have a close look at this ITAT case law and the Tribunal’s observations, but before we proceed, let’s have a brief understanding of ITAT.<\/p>\n\n\n\n

Income Tax Appellate Tribunal<\/h2>\n\n\n\n

The ITAT, or the Income Tax Appellate Tribunal, is a quasi-judicial authority where appeals can be filed against the orders of the income tax authorities. The appeal can be filed by taxpayers who do not agree or who feel aggrieved by the assessment order or any other order made by the income tax authority. The power is also available with the income tax authority to file an appeal against the Commissioner of Income Tax (A) order.<\/p>\n\n\n\n

The ITAT works under the supervision of the High Court within its jurisdiction. The ITAT is required to follow the precedent set by the High Court. The ITAT shall also follow the precedent or the law laid down by any statute or the apex court of the country. <\/p>\n\n\n\n

Let’s now discuss the ITAT case law.<\/p>\n\n\n\n

ITAT Case Law- Prolific Research Pvt. Ltd. Vs DCIT<\/h2>\n\n\n\n

Facts of the Case<\/u><\/strong><\/p>\n\n\n\n

In this ITAT case law,an appeal was filed before the Income Tax Appellate Tribunal by the assessee opposing the Order of the CIT (Appeals).<\/p>\n\n\n\n

The assessee is a company that is engaged in the work of gathering market<\/a> research data. It also conducts surveys and interviews in different nations based on the project specifications given by its clients. In consideration, it obtains payment on the basis<\/a> of cost per interview. In order to prepare the survey design and questionnaire, the assessee logs into the web portal of a Netherlands-based company and uses its survey link for the purpose.<\/p>\n\n\n\n

The assessee company levies charges from its customer for the survey data and the payments are made by the assessee of Rs. 7,24,268 in 6 instalments to the web portal of a Netherland-based company.<\/p>\n\n\n\n

The AO held that the combined reading of the meaning of the hoisting charges claimed by the assessee and the nature of the services provided by the Netherlands-based company clarifies that the services provided to its clients are royalty and fees for the technical services as mentioned under section 9(1)(vii) of the Income Tax Act.<\/strong><\/p>\n\n\n\n

Therefore, the assessee had failed to withhold the tax before paying to the Netherlands-based Company. The assessing officer held that according to Article 12(5) of the India-Netherlands DTAA , the payment of consideration for the services provided by the Netherlands based Company falls within the meaning of the fees for included services and therefore, the assessee should have deducted tax.<\/p>\n\n\n\n

Therefore, the assessing officer charged for the short deduction of taxes under section 201 (1) of Rs. 78,264 and interestpayable under section 201(1A) of Rs. 20,279 in all aggregating to Rs. 98,543 for which the assessee has been treated as in default.<\/p>\n\n\n\n

Feeling aggrieved by this order, the assessee approached the commissioner of income tax (appeals).<\/p>\n\n\n\n

Appeal before Commissioner of Income Tax (Appeals)<\/u><\/strong><\/p>\n\n\n\n

The assessee stated that the said Netherlands-based company is not having any establishment in India. As per the agreement between the said Netherlands-based company and the assessee, the customer possess theright to use the related documents and software. <\/p>\n\n\n\n

The assessee was called upon to explain why the ratio of the judgment made by the Hon’ble Madras HC in the matter of Verizon Communications Singapore Pte. Ltd. vs ITO, where the remittance made by the Indian customers to the taxpayer to provide bandwidth or telecom services through international private lease circuit is taxable as royalty. The Court held that such payment amount to royalty under the Indian Tax Laws and the DTAA between India and Singapore.<\/p>\n\n\n\n

The Court had also observed that the post-introduction of explanation 5, Section 9 (1) (vi) of the Income Tax Act, the scope and definition of Royalty under the Act has expanded. Further, the assessee could not show any decision on record of any other Court after the judgment of the Madras High Court after considering the post-amendment<\/a> by Finance Act 2012<\/strong>[1]<\/strong><\/a><\/sup> and the introduction of Explanation 5, Section 9(1)(vi) of the IT Act.<\/p>\n\n\n\n

In view of this, the Commissioner of Income Tax (Appeals) dismissed the appeal.<\/p>\n\n\n\n

ITAT Case Law- Explanation 5 to Section 9(1)(vi) of the Income Tax Act<\/u><\/strong><\/p>\n\n\n\n

For a better understanding of the instant ITAT case law, Section 9(1)(vi) with Explanation 5 is given below-<\/p>\n\n\n\n

Section 9 (1) states the type of income deemed to accrue<\/a> or arise in India.<\/p>\n\n\n\n

Clause (vi) provides for income by way of royalty paid or payable by the government or by a person who is a Indian resident, except where the royalty has to be paid in respect of a right, property<\/a>, or information used or services used for business or profession carried out by a person outside India or for earning any income from a source outside the territory India, where the royalty has to be paid in respect of a right, property or information used or services used for business or profession carried out by a person in India for making an income from any source in India.<\/p>\n\n\n\n

Explanation 5- It clarifies that the royalty shall include consideration in respect of any right, property, or information whether or not-<\/p>\n\n\n\n