Criteria for a service being either �Royalty� or �Fee for technical services� under DTAA

IN THE INCOME TAX APPELLATE TRIBUNAL
“B’’ BENCH: BANGALORE
BEFORE SHRI B. R. BASKARAN, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
ITA No.2645/Bang/2017
Assessment Year: 2013-14

M/s. Trelleborg India Pvt. Ltd.
(Previously known as Trelleborg Industrial
Products India Pvt. Ltd.)
(Successor in interest to Trelleborg Sealing
Solutions India Pvt. Ltd.)
#22/9, Beretana Agrahara
Hosur Main Road
Bengaluru 560 100

PAN NO : AAECT1088L

vs

Deputy
Commissioner of
Income-tax
Circle-7(1)(1)
Bengaluru

Appellant by : Shri Tata Krishna, A.R.
Respondent by : Shri Priyadarshi Mishra, D.R.
Date of Hearing : 30.08.2021
Date of Pronouncement : 01.09.2021

O R D E R

The assessee is engaged in the business of manufacture and sale of seals and bearings. The assessee has entered into an international transaction of payment of communication charges to its Associated Enterprise (A.E.) The TPO held that the payment to be at arm’s length and accordingly, did not make any transfer pricing adjustment. The A.O., however, noticed that the assessee has not deducted tax at source on the amount of Rs.54 lakhs paid to it’s A.E. Accordingly, the A.O. issued show cause notice to the assessee to explain why disallowance u/s 40(a)(i) of the Act should not be made. In the reply, the assessee submitted that it is covered by DTAA entered between India and Sweden.

2. The Ld. CIT(A) also referred to the decision rendered by Hon’ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Ltd. 203 Taxman 477, wherein it was held that the payment made for purchase of software is in the nature of royalty. Accordingly, the Ld. CIT(A) directed the A.O. to disallow payment of Rs.1,03,17,271/- for non-compliance of TDS provision as the payment is nothing but fees for technical services liable for TDS or payment for purchase of software. He also observed that the A.O. should verify the details of TDS deducted from the payment of management fee of Rs.52,67,660/-. It can be noticed that the Ld CIT(A) has held that the impugned payment is Fee for technical services or Royalty. Aggrieved by the order passed by Ld. CIT(A), the assessee is in appeal before us.

3. The Ld. A.R. submitted that the assessee has neither purchased any software or got the license to use any of the software belonging to the AE. All the facilities are owned by the AE and the payment has been made for use of those facilities. He further submitted that the use of infrastructure facilities cannot be termed as provision of technical services by AE to the assessee. Accordingly, he submitted that the impugned payments would not fall under the category of either royalty or fee for technical services within the meaning of “India Sweden DTAA”. It would constitute business income in the hands of AE and since the AE does not have permanent establishment, no income is chargeable to tax in India in the hands of AE. Accordingly, he submitted that the assessee is not liable to deduct tax at source from the above said payments u/s 195 of the Act.

4. In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on 1st Sept, 2021.

Please find attached the enclosed file for the full judgement