CAE Simulation Training P. Ltd. Vs DCIT (ITAT Delhi)
ITAT Delhi held that consideration paid for testing the ability of candidates do not fall within the purview of royalty under Article 13 of India-UK DTAA. Hence, there is no obligation withholding of tax u/s 195 of the Income Tax Act.
Facts- The assessee is a private limited company engaged in the business of training pilots and also providing services in relation to assessment of pilot candidates for its customers. The case of the assessee was selected for complete scrutiny through CASS.
AO made disallowance of Rs. 1,03,45,058/- under section 40(a)(i) of the Income Tax Act, 1961 on account of failure to deduct tax at source u/s. 195 of the Act out of payments made by the assessee outside India to Symbiotics Ltd., UK holding such payments to be in the nature of royalty under the Act as well as India-UK DTAA.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Symbiotics Ltd. UK is merely testing the ability of the candidates as per the parameters / standards of the assessee so as to ascertain whether the candidates meet the quality / performance criteria of the assessee. Hence, the consideration paid by the assessee to Symbiotics Ltd. UK for provision of candidate’s reports do not fall within the purview of royalty under Article 13 of the India-UK DTAA.
Held that the impugned payment to Symbiotics Ltd. UK is not royalty and the fact that the Symbiotics Ltd. UK has no PE in India and therefore not assessed to tax in India, the assessee has no obligation to withhold tax on the impugned payment made by it to Symbiotics Ltd. UK under section 195 of the Act. It is well settled position of law that the tax is required to be withheld in respect of payments made to a non resident only if such payment is chargeable to tax in India. Accordingly, the disallowance of the payment of Rs. 1,03,45,058/- made to Symbiotics Ltd. UK under section 40(a)(i) for non deduction of tax at source is hereby deleted.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the assessee is directed against the order dated 30.08.2022 of the Ld. Commissioner of Income Tax, (Appeals), National Faceless Appeals Centre (NFAC), Delhi (“CIT(A)”) pertaining to Assessment Year (“AY”) 2017-18.
2. The assessee has raised the following grounds of appeal:
‘1. That on the facts and circumstances of the case and in law, the assessment order dated 27.12.2019 and also the impugned order dated 30.08.2022 passed by the Ld. Commissioner of Income Tax (Appeal Unit)-1 [“CIT(A)”] under section 250 of the Income Tax Act, 1961 (the Act) is illegal, bad-in-law and liable to be quashed/ set-aside
1.1. That the CIT(A) erred in passing the impugned order on mere conjectures and surmises, without considering the submissions made during the course of proceedings and without providing any opportunity of being heard, which is in gross violation of principles of natural justice.
1.2. That the CIT(A) erred on facts and in law in not quashing/ setting aside the assessment order dated 27.12.2019 passed under section 143(3) of the Act passed in violation of principles of natural justice and the mandatory procedure of assessment.
Re: Disallowance of depreciation on CISCO IP Phone
2. That the CIT(AVAO erred on facts and in law in restricting depreciation on CISCO IP Phones to Rs.47,713 computed @15 percent as against Rs.1,90,854 computed @60 percent claimed by the appellant.
2.1 That the CIT(AVAO failed to appreciate that on application of the functional test, since CISCO IP Phone performed functions similar to a computer, the same is eligible for depreciation at higher rate of 60 percent.
Re: Disallowance under section 40(a)(1) for alleged non-deduction of tax at source 249 2525 132 0484 law.com
3. That the CIT(A) erred on facts and in law in confirming the disallowance of Rs.1,03,45,058 under section 40(a)(i) on account of alleged non-deduction of tax at source under section 195 of the Act out of remittances outside India to Symbiotic Ltd., UK (in short “Symbiotic”).
3.1. That the Ld. CIT(A) grossly erred on facts and in law in holding the payment/ remittances to Symbiotic to be in the nature of royalty’ covered both under section 9(1)(vi) of the Act and Article 13(3) of the DTAA between India and UK.
3.2 That the CIT(A)/AO erred on facts and in law in holding that payment to Symbiotic was towards license/ right to use the intellectual property of Symbiotic and hence payment is in the nature of “royalty”.
3.3 That the CIT(A) AO failed to appreciate that the definition of royalty under the India-UK DTAA is much narrower in scope than the definition provided under the Act and the payment made is not covered by the said definition.
3.4. That the CIT(A) erred on facts and in law in holding that the software Adapt, used by Symbiotic to prepare “candidate written report’ has access to UK located file servers and such servers fall within the meaning of model, design, secret formula or a process etc. stated in Explanation 2 to section 9(vi) of the Act without appreciating that the report is sold/ transmitted by Symbiotic to the appellant electronically which is in the nature of copyrighted product and the appellant is not provided with access to any software of Symbiotic.
3.5 That the CIT(A)/AO failed to appreciate that Symbiotic is merely testing the ability of the candidates as per the parameters/ standards of the appellant so as to ascertain whether the candidates meet the quality/performance criteria of the appellant company.
3.6 That the CIT(A) failed to appreciate that in the absence of the amount remitted being determined as taxable in the hands of the non-resident recipient, the same could not have been disallowed under section 40(a) of the Act.
3.7 That that disallowance under section 40(a)(i) should, if at all, be directed to be made having regard to the clarificatory/curative amendment made under section 40(a)(ia) of the Act which provides that disallowance should be restricted to 30% of the expenditure.
3. The assessee is a private limited company engaged in the business of training pilots and also providing services in relation to assessment of pilot candidates for its customers. For AY 2017-18, the assessee filed its return declaring income of Rs. 15,03,98,960/-. The case of the assessee was selected for complete scrutiny through CASS. Statutory notices were issued to the assessee in response to which the assessee filed necessary details online through ITBA, which are placed on record.
4. The reply/submission of the assessee was not found tenable by the Ld. Assessing Officer (“AO”). The Ld. AO treated the CISCO IP Phones as part of plant and machinery and did not allow the depreciation rate of 60% applicable for computers claimed by the assessee, thereby restricting depreciation on CISCO IP Phones to Rs. 47,713/- computed at 15% as against Rs. 1,90,854/- computed at the rate of 60% claimed by the assessee. He also made disallowance of Rs. 1,03,45,058/- under section 40(a)(i) of the Income Tax Act, 1961 (the “Act”) on account of failure to deduct tax at source under section 195 of the Act out of payments made by the assessee outside India to Symbiotics Ltd., UK holding such payments to be in the nature of royalty under the Act as well as India-UK DTAA. The Ld. AO therefore completed the assessment under section 143(3) of the Act vide his order dated 27.12.2019 on total income of Rs. 16,08,87,158/- after making the following additions:-
