Payment To UK-Based Company For Preparing Candidate Written Report By CAE Simulation Training Is Not A Royalty: ITAT

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that payment to a UK-based company for preparing candidate written reports by CAE Simulation Training is not a royalty.

The bench of G.S. Pannu (President) and Astha Chandra (Judicial Member) has observed that the candidate’s report is delivered to the assessee electronically, which is in the nature of a copyrighted product, and mere access to use the server or software to download the reports cannot be regarded as a transfer of any licence or copyright in the software so as to fall within the definition of "royalty" under Article 13 of the India-UK DTAA.

The appellant/assessee is in the business of training pilots and also providing services in relation to the assessment of pilot candidates for its customers. The case of the assessee was selected for complete scrutiny. Statutory notices were issued to the assessee, in response to which the assessee filed the necessary details.

The assessee pays consideration to Symbiotics Ltd. UK for providing the candidate’s written report, which contains the candidate's score against the measured attributes and a performance appraisal against the high-level training objectives of the assessee, so as to ascertain the ability of the candidates as per the parameters and standards of the assessee.

The AO disallowed the amount 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 under Section 195 out of payments made by the assessee outside India to Symbiotics Ltd., UK. The AO held the payments were in the nature of royalty under the Income Tax Act as well as the India-UK DTAA.

The assessee contended that it has no access to the software, equipment, etc. of Symbiotics Ltd. UK; what the assessee gets is just a report via email. The consideration paid by the assessee for candidate reports provided by Symbiotics Ltd., The UK, cannot, by any stretch of imagination, fall within the meaning of "royalty" in terms of Article 13 of the India-UK DTAA. The assessee has not been provided with use of or the right to use any copyright of a literary, artistic, or scientific work or any patent, trade mark, design or model, plan, secret formula, or process. The report provided by Symbiotics Ltd. UK to the assessee merely contains the candidate's score against the measured attributes and a performance appraisal against the high-level training objectives of the assessee so as to ascertain the ability of the candidates as per the parameters and standards of the assessee. The assessee has no right to access, modify, or duplicate such source code, which is evident from clause vii of the agreement.

The tribunal noted that what Symbiotics Ltd. UK is doing for the assessee is merely testing the ability of the candidates as per the parameters and standards of the assessee so as to ascertain whether the candidates meet the quality and performance criteria of the assessee.

The tribunal ruled that the consideration paid by the assessee to Symbiotics Ltd. UK for the provision of candidates' reports does not fall within the purview of royalty under Article 13 of the India-UK DTAA.

The ITAT stated that payment to Symbiotics Ltd. UK is not royalty, and given the fact that Symbiotics Ltd. UK has no PE in India and therefore is 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.

The ITAT held 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.

Case Title: CAE Simulation Training P. Ltd. Versus DCIT

Case No.: ITA No. 2573/Del/2022

Date: 18 09.2023

Counsel For Appellant: Rohit Jain

Counsel For Respondent: Sanjay Kumar

Click Here To Read The Order