TDS not deductible as patent/copyright not used against royalty paid
Facts and Issues of the case
The assessee is Central Public Sector Undertaking. The assessee has entered into an agreement with University of Texas at Austin, USA. The agreement was entered to carry out research activity in collaboration with the assessee for the development of suitable chemical Enhanced Oil Recovery (EOR) formulations for its 5 reservoirs. The assessee agreed to pay to the University of Texas at Austin for the services to be availed as per the agreement for a sum of USD 0.99 million for each reservoirs which comes to USD 4.95 million in aggregate.
The assessee for an order u/s 195(2) of the Act to the ITO Int. Tax, to determine the proportion of sums chargeable to tax on which tax is required to be deducted.
The ITO Int. Tax observed that the payments to be made to University of Texas at Austin, USA are in the nature of royalties/fees for technical services. Therefore, the AO directed the assessee to deduct the TDS @ 10% (excluding education cess/surcharge) on gross payments to be made to the University of Texas at Austin, USA.
Observations by the Court
The Court has heard the rival contentions of both the parties and perused the materials available on record. The important issue before us relates whether the services rendered by non-resident University of Texas at Austin, USA to carry out research programme for development of suitable chemical Enhanced Oil Recovery (EOR) formulations in collaboration with the assessee is covered under “royalties/fees for technical services” or not.
Admittedly, the assesse is engaged in the extraction and production of mineral oil and natural gas. The assessee has entered into an agreement with the non-resident University of Texas at Austin, USA to carry out the research programme at its 5 reservoirs with the objective and scope of work as detailed in the agreement.
The assessee has made payment to avail the technical services of USD 4.95 million to University of Texas at Austin, USA. It is also pertinent to note that, the services rendered by University of Texas at Austin, USA is tax resident of USA, therefore India-USA DTAA has also to be applied in the case on hand.
From the statutory provisions of section 9 of the Act and the relevant clauses of article 12 in the DTAA, it is clear that there is marked distinction between royalty and fees for technical services. Section 90 which deals with the Double Taxation relief provides that the provisions of the DTAA override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to Income-tax and ascertainment of total Income-tax.
The test is whether the recipient of the service is equipped to carry on his business without reference to the service provider. If he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available.
It is in this background one has to look at the facts of this case, in order to find out whether the service provider has made available the technical knowledge to the assessee so as to fasten the liability of payment of tax. In this connection, we have referred the agreement between the assessee and University of Texas at Austin, USA, defining the scope of work and note that there was neither any patent/copyright used by the assessee against which the royalty was paid nor there was any technical know-how which was made available to the assessee. Thus in such facts and circumstances there is no liability on the assessee to deduct the TDS in pursuance to the Article 12 of India-USA DTAA.
From the above, there remains no ambiguity to the fact that there was any royalty payment made by the assessee or any technical know-how was received by the assessee. Accordingly, we set aside the finding of the CIT-A and direct the AO to delete the addition made by him.
When neither copyright nor patent is used by an individual against whom royalty was paid or technical know-how made available to them then TDS is not deductible.Oil-and-Natural-Gas-Corporation-Limited-Vs-ITO-ITAT-Ahmedabad