2025 (10) TMI 1054 - AT - Income Tax

Payments for use of IT infrastructure not royalties under Indo-Belgium DTAA Article 12(3)(a); no TDS liability

ITAT (Pune) - AT: Third Member concurred with the Judicial Member that payments for use of an IT infrastructure facility do not fall within the treaty's ... Infrastructure facility falls within the specified definition of 'plant' - scope of term 'scientific equipment' - taxability of the impugned payments as Royalty under the treaty - Whether payment consideration made by the assessee falling within the definition of royally u/s 9(1)(vi) of the Act (as per Tribunals order) whether falls within the ambit of article 12(3)(a) of Indo-Belgium Double Taxation Avoidance Agreement entered between India and Belgium as applicable for the year under consideration? - matter reffered to Third Member HELD THAT:- The Hon’ble Third Member while concurring with the view point of Hon’ble Judicial Member held that payment for the “use of IT infrastructure facility” do not fall within the definition of “Plant” since the language in the Article 12(3)(a) of the India Belgium Tax Treaty contains the words ‘Plan” and not “Plant”. Therefore, on account of absence of the relevant clause ‘for the use of or right to use industrial / commercial, scientific equipment’, the payments made by the assessee for the use of IT infrastructure facility would not be liable for TDS. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Tribunal had jurisdiction to recall its earlier order for limited re-examination of the tax characterisation of consideration paid for use of IT infrastructure under the applicable India-Belgium DTAA. 2. Whether the payments made by the assessee to its Belgium resident associated enterprise for IT support/IT infrastructure (SAP licences, maintenance, backup/disaster recovery, antivirus, remote helpdesk, internet, VPN etc.) constituted 'royalty' or 'fees for technical services' under domestic law (section 9(1)(vi) and allied provisions) and thus taxable/subject to withholding. 3. Whether, for the assessment year in question, those payments fell within the definition of 'royalty' under Article 12(3)(a) of the India-Belgium Double Taxation Avoidance Agreement - specifically whether the treaty term is 'plan' or 'plant', and whether the express phrase 'for the use of, or the right to use, industrial, commercial or scientific equipment' applied. 4. Whether the exclusion (by Gazette Notification S.O.54(E) dated 19.01.2001) of the expression 'use of industrial, commercial or scientific equipment' from Article 12 altered the treaty scope such that the impugned payments were not taxable as equipment/industrial royalty and therefore no TDS was required and no disallowance under section 40(a)(i) should stand. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Tribunal's jurisdiction in recalled order Legal framework: Power of the Tribunal to recall or re-open its order when a misc. application shows an inadvertent error that affects the outcome, limited to the question(s) framed upon recall. Precedent Treatment: The members framed specific questions for reconsideration; the matter was referred to a third member due to difference of opinion between members. Interpretation and reasoning: The Tribunal accepted the Miscellaneous Application as raising an inadvertent error - namely reliance on a treaty test that may not have been applicable for the year - and recalled the order for limited examination of treaty applicability because treaty characterization would affect TDS liability and consequential section 40(a)(i) disallowance. Ratio vs. Obiter: Ratio - the Tribunal may recall its order for limited re-examination where an error shown by application materially affects tax characterisation and withholding consequences. Conclusions: The recall was proper for the narrow purpose of reassessing treaty applicability to the impugned payments. Issue 2 - Characterisation under domestic law (section 9(1)(vi) etc.) Legal framework: Domestic provisions deem certain payments as royalty (industrial/equipment royalty) under section 9(1)(vi) and related definitions; the AO/DRP treated the payments as royalty/FTS and disallowed under section 40(a)(i) for failure to withhold tax. Precedent Treatment: The Tribunal's earlier order had recharacterised the transactions as use of IT infrastructure facility and held them taxable as industrial/equipment royalty under the Act (and under treaty as then read). Interpretation and reasoning: The Third Member reviewed the factual matrix - payments were allocations of global IT costs by the Belgian AE for provision of IT infrastructure/support. While the domestic law characterization (as payments for use of IT infrastructure) may support classification as royalty under section 9(1)(vi) if the domestic definition applies, treaty analysis for source taxation and withholding obligations governs tax at source for the non-resident recipient. Ratio vs. Obiter: Obiter - factual finding that the payments were for use of IT infrastructure; Ratio - even if domestic law might characterise as royalty, treaty wording controls the withholding obligation for the relevant year. Conclusions: While the nature of payments as consideration for IT infrastructure use was accepted factually, treaty interpretation for the relevant year determines withholding liability; therefore domestic section 9 characterisation alone did not resolve TDS obligation without treaty analysis. Issue 3 - Treaty interpretation: 'plan' vs 'plant' and scope of Article 12(3)(a) Legal framework: Article 12(3)(a) defines 'royalties' in the India-Belgium DTAA; Protocol/Notification (S.O.54(E) dated 19.01.2001) modified the treaty text effective 1.4.1998 (India) / 1.1.1998 (Belgium) to substitute paragraph 3(a) excluding 'use of industrial, commercial or scientific equipment' from the royalty definition and aligning scope with other OECD/UN language using 'plan' (not 'plant'). Precedent Treatment: Prior Tribunal opinions (e.g., Chennai Bench in Baggerwerken Decloedt En Zoon and related authorities) treated the appearance of 'plant' in the published text as a typographical error and held the correct term is 'plan', thereby excluding equipment use from treaty 'royalty'. Interpretation and reasoning: The Third Member examined the Gazette Notification which explicitly substituted Article 12(3)(a) to read payments for use/right to use copyrights, patents, trademark, design, model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience - notably containing 'plan' and omitting 'use of industrial, commercial or scientific equipment'. The Tribunal accepted submissions that the word 'plant' (appearing in some texts) is a typographical error; neither the OECD nor UN Model Conventions nor other India treaties use 'plant'. The Notification and earlier tribunal jurisprudence support reading the treaty as containing 'plan' and not 'plant'. Therefore the express clause taxing 'use of or right to use industrial, commercial or scientific equipment' is absent from the operative treaty text for the year under consideration. Ratio vs. Obiter: Ratio - where the operative treaty text (as modified by the Gazette Notification) excludes equipment use from the royalty definition and contains 'plan' (not 'plant'), payments for use of IT infrastructure do not fall within Article 12(3)(a) royalty; reliance on the textual typo 'plant' is impermissible. Conclusions: The correct treaty wording is 'plan' (not 'plant') and the clause taxing use/right to use industrial/commercial/scientific equipment is excluded by the Notification; consequently the impugned payments are not royalty under Article 12(3)(a) of the India-Belgium DTAA for the year in question. Issue 4 - Effect on withholding/TDS and section 40(a)(i) disallowance Legal framework: If payments to a non-resident are taxable under the DTAA as royalty/FTS, the Indian payer must withhold tax; failure attracts disallowance under section 40(a)(i). If treaty exempts or narrows scope below domestic law, withholding is not required to that extent. Precedent Treatment: DRP bifurcated payments and assessed taxability; Tribunal originally affirmed royalty treatment under an erroneous treaty reading; on recall the error was corrected following Notification and precedent. Interpretation and reasoning: Since Article 12(3)(a) as applicable for the year did not include equipment use within 'royalties', the payments for IT infrastructure use fall outside treaty royalty. Therefore there was no treaty basis to tax the receipts in Belgium as equipment royalty and no obligation on the Indian payer to withhold tax on that basis for the year in question. Consequentially the ground for section 40(a)(i) disallowance, premised on failure to withhold on royalty/FTS, falls away as regards those amounts. Ratio vs. Obiter: Ratio - absence of treaty-based royalty/FTS characterization for the year negates TDS obligation and removes justification for the section 40(a)(i) disallowance premised on non-withholding of tax on such payments. Conclusions: Payments for use of IT infrastructure were not taxable as industrial/equipment royalty under the India-Belgium DTAA as applicable for the year (owing to absence of the equipment clause and the correct reading 'plan'), hence no TDS obligation arose on that basis and the section 40(a)(i) disallowance cannot be sustained; the majority (Judicial Member and Third Member) view is affirmed and the appeal allowed. Cross-references See Issue 3 for treaty textual analysis that determines the outcome on Issues 2 and 4; the Tribunal's jurisdiction to recall (Issue 1) enabled re-examination of the treaty point which proved decisive.