2017 (6) TMI 81 - AT - Income Tax

Tribunal Upholds Tax Demand for Royalties Paid to Germany: Consideration for SOPs Sharing Taxable

The tribunal dismissed the appeal and upheld the tax withholding demand under section 201 r.w.s. 195 of the Income Tax Act, 1961. The payments made for ... TDS u/s 195 - tax withholding demand - remittance to OSE Oncology Services Europe S.a.r.l, Germany - DTAA - PE in India - Held that:- The essence of the arrangement, even going by the material on record and admission of the assessee in unambiguous words, is on sharing the SOPs, which, as we have noted above, amounts to sharing of scientific experiences taxable under article 13 of Indo German tax treaty. As for the fact that OSE does not have a permanent establishment in India, it is only elementary that existence of PE is sine qua non only for taxation of business profits but that the foreign entity not having a PE in India does not come in the way of taxation of royalties- which precisely is the case of the revenue. In this view of the matter, the payment for sharing of the SOPs, as is the case before us, indeed taxable as ‘royalties’ under the Indo German tax treaty. We see no reasons to interfere in the conclusions arrived at by the authorities below. Once we come to the conclusion that the consideration received by the OSE, for sharing of SOPs, was taxable in its hands in terms of the provisions of the Indo German tax treaty, and there is nothing before us to even challenge its taxability under the provisions of the domestic law either, it is only a natural corollary of this finding that the assessee ought to have deduct tax at source from the payment in question. There is no, and there cannot be any, challenge to this fundamental legal position. There is thus no infirmity in the impugned tax withholding demand. - Decided against assessee. Issues Involved:Tax withholding demand under section 201 r.w.s. 195 of the Income Tax Act, 1961 for the assessment year 2009-10 regarding remittance of Euros 45,000 to a Germany-based entity.Detailed Analysis:1. Background and Arguments:The appeal was filed against the order upholding a tax withholding demand raised on the assessee for remittances made to a Germany-based entity without tax deduction at source. The Assessing Officer considered the payments as royalties under section 9(1)(vi) of the Act, leading to the demand under section 201 r.w.s 195. The assessee argued that since the payments were for sharing SOPs, access to database, and software without a permanent establishment in India, they were not taxable in India.2. Agreement Analysis:The agreement between the parties clarified that the payments were not for the use of name, brand, or logo but for SOPs, database access, and software. The invoices also specified that the payment was for the transfer of know-how, i.e., SOPs. The nature of the consideration was crucial in determining the taxability of the payments.3. Nature of SOPs and Tax Treaty Analysis:The SOPs shared were matured validated standard procedures developed by the German entity, which were non-transferable and not subject to changes by the assessee. The sharing of SOPs was considered as sharing 'information concerning industrial, commercial, or scientific experience,' falling under the definition of royalties under the India-Germany tax treaty.4. Taxability Conclusion:The sharing of SOPs was deemed taxable as royalties under the tax treaty, irrespective of the absence of a permanent establishment in India. The essence of the arrangement was the sharing of scientific experiences, making the payments subject to tax withholding. The tribunal confirmed the tax withholding demand, emphasizing the legal obligation to deduct tax at source from such payments.5. Judgment and Conclusion:The tribunal dismissed the appeal, upholding the tax withholding demand based on the tax treaty provisions and the nature of the payments made for sharing SOPs. The decision highlighted the importance of considering the specific nature of the consideration in determining the taxability of transactions under relevant tax treaties and domestic laws.This detailed analysis of the judgment provides a comprehensive understanding of the issues involved, the arguments presented, the agreement's significance, the nature of SOPs shared, and the tax treaty provisions leading to the final decision of upholding the tax withholding demand.