Deloitte Haskins & Sells LLP Vs DCIT (ITAT Mumbai)
The sole issue which permeates in all the appeals is, whether the appellants were liable to deduct tax at source under Section 195 of the Act on the payments made to Holdings by treating it to be Royalty under Article 13(3) of the India-UK DTAA. As noted above, Deolitte Global Holdings has been incorporated by DTTI to facilitate attainment of various objectives to further international alignment, co-operation, cohesion and professional standards of highest quality amongst its member firms, such as the appellants herein. It incurs expenses for the above activities for the benefit of all the members which are then recovered from the members without any mark-up.
The terms on which the activities are carried out by Holdings and the expenses recovered by it from the members have been enshrined in the “Shared Services Agreement”. Though there are many services which have been enumerated in the said “Shared Services Agreement”, however, the dispute is with regard to the payments made under the head global brand, global communication and global technology/knowledge management.
As regards payment for items of global brands, it has been stated that Holdings assists in implementing brand strategy for use of network of Deloitte members and also provides member firms with common training, policies and guidance related to the brands. Further, it will work together with all the member firms leadership, industries, functions on promoting brand addition eminence building. It has been stated to be more of guidance and advisory and not providing any intellectual property. Thus, providing common policies or guidance relating to the brand and collaborating with member firms ostensibly cannot be reckoned as use of or right to use any copyright of literary, artistic or scientific work. Holdings only perform various activities for its members and its guidance is only for internal use by the member firms. Hence, in our view payment for such services cannot be considered for information concerning industrial, scientific or commercial experience. Again, there is no transfer of intellectual property by Holdings to the appellants and also there cannot be a case of giving industrial, commercial or scientific equipment. Thus, the payments made for global brand cannot be treated as in the nature of Royalty as per Article 13(3) of India-UK DTAA. Another important thing is that the payment is also not for any use of trademark/patent provided by Holdings.
Insofar as payments for global activities given in Global Communication, Holdings distributes the publications and reports for DTTI and support global public relations, thought leadership initiatives, events, guidance, common standards, guidelines, organising internal events, etc so that there is alignment of all the member firms for internal and external communication. It gives guidance about the media communication, distribution of newsletter, external and internal distribution. From a bare perusal of aforesaid activities, it cannot be held that it is for use of or right to use of any copyright of literary, artistic or scientific work or for any other terms given in Article 13(3). Further, it also cannot be held for information concerning industrial or scientific experience and/or for commercial experience because the basic underlying fact is that it is purely for internal use of member firms and not for any third party or any client. Thus, these activities cannot be reckoned for providing industrial, commercial or scientific equipment to the appellants and, therefore, outside the nature and scope of Royalty as defined in Article 13(3) of the India-UK DTAA.
Lastly, as regards the services mentioned in global technology/global management, from the bare perusal of the same it cannot be said to be for use of or right to use any copyright or any literary, artistic or scientific work or any transfer of intellectual property rights. The above service is purely for internal purpose and not for any commercial exploitation, nor any scientific equipment is given to the appellants by Holdings. Global network acquires certain technology products from vendors and provides them to the member firms and also provides security advice to all the member firms for which it also develops certain database, systems and websites that is used by all the members of the network. The software acquired by the network and distributed to the members does not include payment for use of or right to use computer software as it has merely obtained a licenced product from vendors for use of member firms. The licensee was allowed to use the software only for its own business purpose and is not permitted to transfer copy of the software and as such there is no transfer of any right in respect of copyright by the vendors and it is a case of mere transfer of copyrighted article. Thus, the payments made for the activities/services under the aforesaid three heads cannot be held to be in the nature of Royalty as per the definition given in Article 13(3) of the India-UK DTAA and, accordingly, the payments made by the appellants to Holdings cannot be held to be Royalty.
ITAt further held that principle of mutuality cannot be examined in proceedings u/s 195; and secondly, principle of mutuality has to be seen qua in the hands of the recipient, i.e. entity which is receiving the payment and not in the hands of the payer, which is the appellant here. Therefore, we are not entering into the issue of mutuality in this case.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These are bunch of appeals in the case of Deloitte Touche Tohmatsu India LLP and Deloitte Haskins & Sells LLP against separate impugned orders of different dates passed by learned Commissioner of Income Tax (Appeals)-56, Mumbai (in short „ld. CIT (A)’) in relation to the order passed under Section 195 of the Income Tax Act, 1961 (in short „the Act’) for Assessment Years 2018-19 and 2019-20.
2. In all the appeals one common issue and arising out of same facts are permeating, i.e., whether the appellants are liable to deduct tax at source under Section 195 of the Act from the payments made by them to Deloitte Global Holding Services Limited (“Holdings”). In the various grounds of appeal, assessee, in sum and substance, has challenged this issue on the ground of i) principle of consistency; ii) principle of mutuality; iii) that it is in the nature of reimbursement of expenses; and lastly, iv) it is not in the nature of Royalty.
3. The facts in brief and the background qua the issue involved are that the appellants, Deloitte Touche Tohmatsu India LLP (“DTTI”) and Deloitte Haskins & Sells LLP (“DHS”) are limited liability partnership firms rendering professional services to large domestic as well as multinational corporations and are part of Deloitte network worldwide. DTTL, also known as “Global Network” of various member firms, is incorporated in, and a tax resident of, the United Kingdom and it do not per se carry out any income earning activity and has no stream of income. It has been stated before us that, Deloitte Global Holding Services Ltd. (“Holdings”) is a company limited by guarantee organized and existing under the laws of England and Wales. Deloitte Global Holdings is a special purpose vehicle created by Global Network to facilitate the attainment of objectives, inter alia, to further international alignment, cooperation, cohesion and professional standards of the highest quality among its Member Firms (such as DTTI). Deloitte Global Holdings performs various activities for the common benefit of its members. Articles of Association of Deloitte Global Holdings do not permit it to perform any services for third party clients. As per Article 15 of the Articles of Association, Holdings is not permitted to distribute dividends or any other amounts to its members except on winding up in proportion of their contributions. While there may be a surplus/ deficit in a particular year due to over/under recovery of expenses, Holdings is intended to break-even over time. Deloitte Global Holdings incurs expenses in the course of carrying out the above activities for the benefit of all members, which are recovered from members without any mark-up. The terms on which the activities are carried out by Holdings and expenses are recovered by it from its members are embodied in an agreement named as “Shared Services Agreement” entered into by the member firms with Holdings vide agreement dated 1 August 2011 between DTTI and Holdings. The relevant recitals to the agreement (copy appearing at page 521 of the paper book) state that:
> DTTI is a member of Holdings and DTTL whose purpose is, among other things, to further international alignment, cooperation, cohesion and professional standards of the highest quality among its Member Firms and their Affiliates.
> Deloitte Services has been established with a view to facilitating fulfilment of those purposes and Deloitte Services intends to provide certain services to its members (including Holdings).
> Holdings has also been established with a view to facilitating fulfilment of those purposes and Holdings intends to receive certain Services from Deloitte Services and supply the same to its Holding Members (including DTTI).
> Under para 2.A.2 parties acknowledge that Holdings does not have capacity to provide such services and shall, instead, outsource these services to Deloitte Services. Deloitte Services shall make available such services to Holding Members (DTTI).
> Para 3.C states that the parties acknowledge that Holdings will generally be run on a break-even basis.
3.1 The services provided under the Shared Service Agreement are enumerated at pages 540 to 543 of the paper book. In short, these are:
1. Global AERS; Global FAS; Global Tax; Global Consulting
2. Global Clients, Global Services and Related Programs
3. Global Strategy; Research; Monitoring
4. Global Brand
5. Global Communications
6. Global Talent/Human Resources
7. Global Technology / Knowledge Management
8. Global Risk Management and Regulations
9. Global Office of General Counsel
10. Global Finance; Procurement
11. Global Corporate Responsibility
4. In continuance with the earlier years, the appellants had made application for issuance of certificate under Section 195(2) for remittance of amounts under the “Shared Services Agreement” to Holdings without deduction of tax at source. It has been brought on record before us that, the respective Assessing Officer have issued certificates for financial year 2012-13 onwards till 2016-17 authorising the remittance of amounts similar to those which has been sought to be remitted in the current year without deduction of tax at source. The copies of these orders and the certificates have been placed in the paper book before us at pages 544 to 548. However, the Assessing Officer while deciding the application filed by the appellants for the Assessment Years 2018-19 and 2019-20 held that payments to the extent they were relatable to, (1) Global brand; (2) Global Communications; and (3) Global Technology/Knowledge Management, were in the nature of royalties, being payments for use of computer software/literary work. Assessing Officer relied on the following decisions in support of his view and, in particular, AO has heavily relied on the decision of the AAR in the case of EY Global Services Ltd. AAR No. 1043 of 2011.
