Customer Lab Solutions Private Limited, Hyderabad, Bangalore V. ITO, Ward-1(2), Hyderabad, Hyderabad

ITA 438/HYD/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6598 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 29-05-2018
• Assessment Year: 2006-2007
• Appeal Filed On: 08-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D PRASAD RAO
• Assessee Lawyers: G V GURUNATHAN
• Keywords: Double taxation relief
• Section: 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 438/HYD/2017 ASSESSMENT YEAR: 2006-07 CUSTOMER LAB SOLUTIONS PVT. LTD., HYDERABAD [PAN: AACCC6751F] VS THE INCOME TAX OFFICER, WARD-1(2), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI G.V. GURUNATHAN, AR FOR REVENUE : SHRI D. PRASAD RAO, DR DATE OF HEARING : 29-05-2018 DATE OF PRONOUNCEMENT : 04-07-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX (APPEALS)-5, HYDERABAD, DATED 28-12-2016, ON THE ISSUE OF TREATING A PAYMENT OF RS. 12,44,072/- ($35,000) TO M/S. BALANCED SCORECAR D COLLABORATIVE INC. OF USA, TOWARDS APPLICATION FEE. 2. BRIEFLY STATED, ASSESSEE IS A COMPANY. IT HAS FIL ED RETURN OF INCOME FOR THE AY. 2006-07 ON 27-11-2006 DE CLARING RS. 3,19,150/- AS INCOME. THE ASSESSMENT U/S. 143(3 ) OF THE I.T.A. NO. 438/HYD/2017 :- 2 - : INCOME TAX ACT [ACT] WAS COMPLETED ON 26-12-2008 DETERMINING THE TOTAL INCOME AT RS. 7,99,530/-. THE CI T-1, HYDERABAD PASSED AN ORDER U/S. 263 OF THE ACT DT. 15-1 1-2010 DIRECTING TO RE-DO THE ASSESSMENT AFTER EXAMINING THE IS SUE RELATING TO ALLOWABILITY OF EXPENDITURE CLAIMED ON AC COUNT OF LICENSE FEE FOR AN AMOUNT OF RS. 12,44,072/-. DURIN G THE FY. 2005-06, ASSESSEE ENTERED INTO AN AGREEMENT WITH M/S. BALANCED SCORECARD COLLABORATIVE INC. OF USA FOR THE PURPOSE OF ITS CONSULTANCY BUSINESS AND ACCORDINGLY PAID A SU M OF RS. 12,44,072/- AS FEE. AO HELD THAT THE FEE PAID AS ROYA LTY WITHIN THE MEANING OF CLAUSE (VI)(B) OF SUB-SECTION (1) OF S ECTION 9 OF THE ACT AND DISALLOWED THE AMOUNT OF RS. 12,44,072/- U /S. 40(A)(IA) OF THE ACT ON THE GROUND THAT NO TDS HAS NOT BEEN DEDUCTED. 3. BEFORE THE LD.CIT(A) IT WAS CONTENDED THAT THE AMOUNT PAID BY THE ASSESSEE TO M/S. BALANCED SCORECARD COLLABORATIVE INC. USA IS AN AFFILIATE FEE. THE SAME IS EVIDENT FROM SECOND CLAUSE-ANNUAL FEE UNDER THE KEY PROVISIO NS. THIS IS REPRODUCED FROM THE AGREEMENT BETWEEN THE ASSESSEE AND M/S. BALANCED SCORECARD COLLABORATIVE INC. 'ANNUAL FEE. WITHIN (14) DAYS OF THE SIGNING OF THI S AGREEMENT, AND UPON EACH ANNIVERSARY OF SUCH SIGNING, THE AFFILIAT E SHALL PAY BSCOL AN AFFILIATE FEE OF $US 35,000. UPON COMPLETION OF THE FIRST YEAR OF THE AGREEMENT, BSCOL RESERVES THE RIGHT TO INCREASE THE ANNUAL FEE BASED ON CHANGING ECONOMIC CONDITIONS OR CHANGES IN THE L EVEL OF INVOLVEMENT NEEDED TO SUPPORT THE RELATIONSHIP. NOT IFICATION OF ANY ANNUAL FEE INCREASES WILL BE MADE AT LEAST (90) DAY S PRIOR TO PAYMENT DUE DATE.' I.T.A. NO. 438/HYD/2017 :- 3 - : ACCORDING TO THE SAID CLAUSE ASSESSEE IS TO PAY AN AM OUNT OF US $ 35,000 TOWARDS AFFILIATE FEE. THIS AMOUNT IS NOT I N CONNECTION WITH USE OF ANY RIGHT TO USE ANY MATERIAL OR SERVICE PROVIDED BY THE NONRESIDENT. AS THERE IS NO INCOME ACC RUING IN INDIA TO M/S. BALANCED SCORECARD COLLABORATIVE INC. ON THE MEMBERSHIP FEES PAID, NO TDS NEED TO BE DEDUCTED. 3.1. CONTENDING FURTHER, ASSESSEE SUBMITTED TO LD.CIT(A) THAT AO IS OF FALSE NOTION THAT THE SAID PA YMENT RS. 12,44,072/- WOULD FALL UNDER MEANING OF ROYALTY UND ER THE EXPLANATION 2 TO SECTION 9(L)(VI) OF THE ACT. THE AFORE SAID PAYMENT IS TOWARDS AFFILIATE FEES. AS PER THE CONCISE OXFORD DICTIONARY NINTH EDITION AFFILIATE MEANS 'TO ATTACH OR CO NNECT WITH A LARGER ORGANIZATION', IN THIS CASE, AFFILIATE FEES REFER TO FEE PAID TOWARDS ASSOCIATION WITH M/S. BALANCED SCORE CARD COLLABORATIVE INC. AS SUCH THERE IS NO INCOME ACCRU ING TO THE NON-RESIDENT IN INDIA. THIS FEE PAID IS NOT TOWARDS: TRANSFER OF ANY RIGHTS IMPARTING OF ANY INFORMATION, USE OF ANY PATENT, INVENTION, DESIGN, MODEL, SECRET FORMULA IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL, SCIENTIFIC KNOWLEDGE, EXPERIE NCE, SKILL THE USE OR THE RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT TRANSFER OF ALL OR ANY RIGHTS IN RESPECT OF COPYRIGHT , LITERARY, ARTISTIC OR SCIENTIFIC WORKS. I.T.A. NO. 438/HYD/2017 :- 4 - : AS THE AFFILIATE FEE PAID IS NOT IN THE NATURE OF ROYAL TY AND DOES NOT FALL AS REFERRED BY THE AO IN HIS ORDER TO THE EXPL ANATION 2 TO SEC 9(1) OF THE ACT. FURTHER IT DOES NOT FALL UNDER TH E MEANING OF ROYALTY AS DEFINED IN ARTICLE 12(3) IN DT AA BETWEEN INDIA AND USA WHICH IS REPRODUCED AS UNDER: THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS: (A) PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OR A LITER ARY, ARTISTIC, OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN C ONNECTION WITH RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRA DE MARK, DESIGN OR MODE, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIE NTIFIC EXPERIENCE, INCLUDING GAINS DERIVED FROM THE ALIENATI ON OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE, OR DISPOSITION THEREOF; AND B) PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL, OR SCIENTIFIC EQUIPMENT, OTHER THAN PAYMENTS DERIVED BY AN ENTERPRISE DESCRIBED IN PARAGRAPH 1 OF ARTICLE 8 (SHIPPING AND AIR TRANSPORT) FROM ACTIVITIES DESCRIBED IN PARAGRAPH 2(C ) OR 3 OF ARTICLE 8. IT IS CLEAR FROM THE ABOVE EXPLANATIONS THAT THE PAYMENT MADE BY ASSESSEE TO M/S. BALANCED SCORECARD COLLABORATIVE INC. DOES NOT FALL UNDER THE MEANING OF ROYALTY I.T.A. NO. 438/HYD/2017 :- 5 - : EITHER UNDER 9(1)(VI) OR UNDER THE MEANING OF ROYALTY AS DEFINED UNDER ARTICLE 12(3) IN DTAA BETWEEN INDIA AN D USA. 3.2. IT WAS FURTHER SUBMITTED THAT AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENT RE (P.) LTD VS. CIT [2010] [327 ITR 456] / 193 TAXMAN 234, TA X DEDUCTION AT SOURCE OBLIGATIONS UNDER SECTION 195(1) ARISE ONLY IF THE PAYMENT IS CHARGEABLE TO TAX IN THE HANDS OF NONR ESIDENT RECIPIENT. THEREFORE, MERELY BECAUSE A PERSON HAS NO T DEDUCTED TAX AT SOURCE FROM A REMITTANCE ABROAD, IT CANN OT BE INFERRED THAT THE PERSON MAKING THE REMITTANCE HAS COMMI TTED A FAILURE IN DISCHARGING HIS TAX WITHHOLDING OBLIGATIO NS BECAUSE SUCH OBLIGATIONS COME INTO EXISTENCE ONLY WHEN RECIPIENT HAS A TAX LIABILITY IN INDIA. TAX WITHHOLDIN G LIABILITY OF THE PAYEE IS INHERENTLY A VICARIOUS LIABILITY, ON BEH ALF OF THE RECIPIENT, AND, THEREFORE, WHEN RECIPIENT DOES NOT HAV E THE PRIMARY LIABILITY TO BE TAXABLE IN RESPECT OF INCOME EMBEDDED IN THE RECEIPT, THE VICARIOUS LIABILITY OF THE PAYER CA NNOT BUT BE INEFFECTUAL. THIS VICARIOUS TAX WITHHOLDING LIABILITY CANNOT BE INVOKED UNLESS PRIMARY TAX LIABILITY OF THE RECIPIENT IS ESTABLISHED. JUST BECAUSE THE PAYER HAS NOT OBTAINED A S PECIFIC DECLARATION FROM THE REVENUE AUTHORITIES TO THE EFFECT THA T THE RECIPIENT IS NOT LIABLE TO BE TAXED IN INDIA IN RESPECT OF INCOME EMBEDDED IN PARTICULAR PAYMENT, HOWSOEVER DESIRABLE B E THAT PRACTICE, THE AO CANNOT PROCEED ON THE BASIS THAT THE PR AYER HAD AN OBLIGATION TO DEDUCT TAX AT SOURCE. HE STILL HAS TO DEMONSTRATE AND ESTABLISH THAT THE PAYEE HAS A TAX LIABIL ITY IN RESPECT OF THE INCOME EMBEDDED IN THE IMPUGNED PAYMENT . I.T.A. NO. 438/HYD/2017 :- 6 - : THAT EXERCISE WAS NOT CARRIED OUT BY AO ON THE FACTS OF THIS CASE. THE AO WAS THUS CLEARLY IN ERROR IN PROCEEDING TO INVOKE DISALLOWANCE UNDER SECTION 40(A)(I) ON THE SHORT GROUN D THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE FROM THE FOREI GN REMITTANCE. 4. LD.CIT(A), HOWEVER, EXTRACTED SOME OF THE CLAUSES OF THE AGREEMENT AND AFTER DETAILED DISCUSSION HELD THA T THE PAYMENT IS IN NATURE OF ROYALTY UNDER THE INCOME TAX ACT AND DTAA AS WELL. 5. CONTENDING THE ABOVE ORDER, ASSESSEE HAS RAISED GROUNDS AND ADDITIONAL GROUNDS AND PLACED PAPER BOOK ON RECORD. 6. LD. COUNSEL REFERRING TO THE SUBMISSIONS MADE BEFORE AUTHORITIES AND MAGAZINES PLACED IN THE PAPER B OOK SUBMITTED THAT THE ASSESSEE HAS PAID AN AFFILIATION FEE O NLY AND NOT ANY FURTHER PAYMENTS TOWARDS CONSULTANCY AND TECHNICA L KNOW-HOW. WHAT THE ASSESSEE GOT IN RETURN WAS A FEW PUBLISHED MAGAZINES AND HAD NOT PAID ANY ROYALTY OR TECHNICAL KNOW-HOW FEE OR ANY FURTHER FEE, THE TERMS OF WHICH LD .CIT(A) RELIED ON. WHILE AGREEING THAT THE THEORETICAL ANALYSIS OF LD.CIT(A) IS CORRECT, IT WAS SUBMITTED THAT IT WAS DEVOI D OF ANY FACTS. IT WAS SUBMITTED THAT ASSESSEE INTENDED TO COLLABO RATE IN TRAINING/ CONSULTANCY SERVICES AND OBTAINED ONLY AF FILIATION BUT THERE WAS NO PARTING OF INFORMATION, PROVISION OF S ERVICES AND USE OF TECHNICAL KNOW-HOW ETC., SO AS TO BE COVE RED BY THE I.T.A. NO. 438/HYD/2017 :- 7 - : PROVISIONS OF DTAA OR IT ACT. IT WAS FURTHER SUBMITTED THAT THERE WAS NO PE TO THE NON-RESIDENT AND THE INCOME OF HARVARD AFFILIATE WAS NOT TAXABLE IN INDIA. LD. COUNS EL RELIED ON THE FOLLOWING CASES: I. JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN THE CASE OF DIT VS. SHERATON INTERNATIONAL INC [313 ITR 267]; II. ORDER OF THE ITAT, DELHI IN THE CASE OF HUGHES ESCOR T COMMUNICATIONS LTD., [51 SOT 356] (DEL); III. DECISION OF AAR IN REGENTS OF THE UNIVERSITY OF CALIF ORNIA UCLA ANDERSON SCHOOL OF MANAGEMENT EXECUTIVE EDUCATION, USA; IV. JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH [271 ITR 401]; V. JUDGMENT OF HON'BLE HIGH COURT OF DELHI IN DIT VS. ERICSSON A.B [343 ITR 470]; VI. JUDGMENT OF THE HON'BLE HIGH COURT OF MADRAS DT. 04-01 - 2017 IN THE CASE OF CIT VS. M/S. VINZAS SOLUTIONS IND IA PVT. LTD., IN TAX CASE APPEAL NO. 861/2016; VII. JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD., VS. CIT & ANR [327 ITR 456]; 7. LD.DR REITERATED THE ARGUMENT OF THE AO AND CIT(A ) TO SUBMIT THAT THE PAYMENT IS FOR USE OF PROCESS AND FOR IMPARTING INFORMATION AS DEFINED IN EXPLANATION-2 TO SE CTION 9(1)(VI) DEFINING ROYALTY. I.T.A. NO. 438/HYD/2017 :- 8 - : 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES. WE HAVE ALSO CO NSIDERED THE SUBMISSIONS OF ASSESSEE AND PERUSED THE PAPER BOO K PLACED ON RECORD. THE AGREEMENT DT. 31-03-2005 BETWEE N THE ASSESSEE AND M/S. BALANCED SCORECARD COLLABORATIVE I NC. OF USA (UNIT OF HARVARD BUSINESS SCHOOL, USA), SPECIFI ES VARIOUS TERMS AND CONDITIONS AND THE RELATIONSHIP, VISION PHIL OSOPHY WHICH THE LD.CIT(A) HAS PAINSTAKINGLY CONSIDERED AN D EXTRACTED IN THE ORDER TO INDICATE THAT THERE IS ARRANGEM ENT FOR USE OF TECHNICAL KNOWLEDGE. HOWEVER, AS SEEN FROM TH E AGREEMENT ITSELF, THERE ARE TWO TYPES OF PAYMENTS. THE AFFILIATION FEE IS ONE-TIME PAYMENT WHICH DOES NOT PRO VIDE FOR TRANSFER OF ANY TECHNOLOGY. ON SIGNING THE AGREEMENT, THE AFFILIATE SHALL PLAY AN AFFILIATE FEE OF US $ 35,000 . THIS FEE BEING ANNUAL FEE IS SUBJECT TO INCREASE OR DECREASE O N CHANGING ECONOMIC CONDITIONS. THE ANNUAL FEE DOES NOT PROVID E FOR ANY TRANSFER OF TECHNOLOGY. HOWEVER, THERE IS FURTHER FEE TO BE PAID FEES ON CONSULTING AND REPORTS IN PARA 4 OF THE AG REEMENT. THIS FEE WILL BE PAID BASED ON THE PERFORMANCE, TARGE TS ACHIEVED BY ASSESSEE IN CONSULTING TECHNOLOGY, TOOLS ETC. WHAT ASSESSEE HAS PAID AND CLAIMED WAS ONLY AN AFFILIATIO N FEE AND NOT THE FEE ON CONSULTING AND REPORTS. SINCE THE PAYME NT OF AFFILIATION FEE DOES NOT INVOLVE ANY TRANSFER OF TECHN ICAL KNOWLEDGE OR USE OF TECHNICAL KNOWLEDGE, THE ENTIRE CA SE LAW RELIED UPON BY THE LD.CIT(A)/AO DOES NOT APPLY TO THE FACTS OF THE CASE. I.T.A. NO. 438/HYD/2017 :- 9 - : 8.1. AS SEEN FROM THE PAPER BOOK PLACED ON RECORD, WHAT ASSESSEE GOT IS IN THE FORM OF TWO MAGAZINES WHI CH ARE PUBLISHED BY THE HARVARD BUSINESS SCHOOL WITH A TITLE BALANCED SCORECARD REPORT. THIS MAGAZINE, SHORT OF MANAGEMENT JARGON, IS NOTHING BUT A PERIODICAL MAGAZI NE WITH VARIOUS WRITE- UPS, WHICH CANNOT BE CONSIDERED AS A R IGHT TO USE A COPY RIGHT. ASSESSEE BEING MANAGEMENT CONSULTAN T, THE AGREEMENT WITH M/S. BALANCED SCORECARD COLLABORATIVE I NC. OF USA, HAD THIS HIGH SOUNDING MANAGEMENT TERMINOLOGY, B UT PUT IT SIMPLY ASSESSEE HAS PAID ONLY THE AFFILIATION F EE AND NOT A FEE FOR CONSULTATION OR FOR TECHNICAL KNOWLEDGE. SINCE THERE IS NO TRANSFER OF TECHNICAL KNOW-HOW OR TECHNICAL KNO WLEDGE OR USE OF TECHNICAL KNOWLEDGE, IN OUR OPINION, THE DEFI NITION ROYALTY EITHER UNDER IT ACT OR UNDER THE DTAA DOES N OT APPLY TO THE PRESENT PAYMENT OF AFFILIATION FEE. SINCE THE M/S . BALANCED SCORECARD COLLABORATIVE INC. OF USA, DOES N OT HAVE ANY PE IN INDIA, THE PAYMENT ITSELF PER SE DOES NOT ATTRACT ANY TDS PROVISIONS. 8.2. THE CO-ORDINATE BENCH IN THE CASE OF HUGHES ESCORT COMMUNICATIONS LTD., [51 SOT 356] (DEL) HAS CONSIDERED THE SIMILAR AFFILIATE AGREEMENT TO HOLD THAT PAYMENTS REMITTED WAS NOT ROYALTY. THE FACTS IN THAT CA SE ARE THAT ASSESSEE HAS ENTERED INTO AGREEMENT WITH ECORNELL, WHEREIN ECORNELL IS TO IMPART EDUCATION TO THE STUDENTS I N INDIA THROUGH THE MEDIUM OF INTERNET WHICH INVOLVES MA KING AVAILABLE TO ITS STUDENTS LOGIN ID AND THEREFORE, GRANT A CCESS TO COURSE MATERIAL RESPOND TO QUERIES, CONDUCT EXAMS AND I.T.A. NO. 438/HYD/2017 :- 10 -: GRANTS CERTIFICATES ETC., FOR WHICH PURPOSES, ECORNELL ENTERS INTO A SEPARATE AGREEMENT [INDIVIDUAL AGREEMENT] WITH THE STUDENTS DIRECTLY. ASSESSEE WAS UNDERTAKEN TO PERFORM R OLE OF MARKETING COURSES, ASSIST THE REGISTRATION PROCESS AND COLLECT COMBINED FEES ETC,. ON THE FACTS, IT WAS HELD: ON A CAREFUL PERUSAL OF THE ABOVE IT IS SEEN THAT THE NATURE OF PAYMENT MADE TO ECORNELL IS NOT 'ROYALTY' AS THE PA YMENT IS NOT FOR THE USE OR THE RIGHT TO USE ANY COPYRIGHT OR LITERA RY WORK. THE FACT THAT IT IS NOT FOR ARTISTIC, SCIENTIFIC WORK, WORK ON FI LM, TAPE, RADIO, TELEVISION, BROADCASTING ETC. DOES NOT ARISE. IT IS ALSO NOT FOR USE OR RIGHT TO USE PATENT, TRADEMARK, DESIGN, PLAN, SECRE T FORMULA OR PROCESS ETC. IT IS PURELY AND SIMPLY A CASE OF POOLING OF R ESOURCES BY WAY OF AN AFFILIATE AGREEMENT WHEREIN THE RESPECTIVE ROLES AND RESPONSIBILITIES HAVE BEEN ASSIGNED AND THE ARRANGE MENT BEING OF THE NATURE OF POOLING OF RESOURCES WHERE FEE SHARING OF THE TWO PARTIES HAVE BEEN SET OUT THIS IS NOT A CASE WHERE ANY PAYM ENT IS BEING MADE TO ECORNELL BY THE ASSESSEE FOR ANY KIND OF SE RVICE AS IT IS PURELY A CASE OF APPORTIONING OF FEES ATTRIBUTABLE TO ECORNELL AS PER THE AFFILIATE AGREEMENT BEING REMITTED TO ECORNELL AND THE PORTION OF THE FEES COLLECTED FOR PROVIDING ENROLMENT INFRASTR UCTURE IN ORDER TO ACCESS THE STUDY MATERIAL BY THE STUDENTS WAS RETAI NED BY THE ASSESSEE AS ITS SHARE. AS SUCH ON FACTS THE PRESENT CASE DOES NOT PARTAKE THE NATURE OF ROYALTY AS CONTEMPLATED UNDER CLAUSE 3(A) OF ARTICLE 12 OF THE INDO-US DTAA. [PARAS 8.12 AND 8.1 3] THUS, THE REMITTANCES MADE TO ECORNELL (TILS) DO NO T FALL IN THE CATEGORY OF ROYALTY AS CONSIDERED IN CLAUSE 3(A) OF ARTICLE 12 OF THE INDO-US DTAA. [PARA 9.6] 8.3. SINCE THE PAYMENT OF AFFILIATION FEE ALONE DO N OT RESULT IN EITHER PROVIDING ANY TECHNICAL SERVICE OR U SE OF TECHNICAL KNOWLEDGE, WE ARE OF THE OPINION THAT BOTH THE AO AND CIT(A) HAVE ERRED IN CONSIDERING THE FEE AS IN TH E NATURE OF ROYALTY. SINCE THERE IS NO TRANSFER OF TECHNOLOGY OR USE OF ANY TECHNOLOGY AND PAYMENT IS ONLY SIMPLY FOR AFFILIATIO N, THE ABOVE AMOUNT CANNOT BE CONSIDERED AS ROYALTY EITHER UNDER THE I.T.A. NO. 438/HYD/2017 :- 11 -: PROVISIONS OF INCOME TAX ACT OR UNDER THE PROVISIONS OF DTAA. THE RESPECTIVE PROVISIONS ARE EXTRACTED IN DETAIL IN TH E SUBMISSIONS OF ASSESSEE BEFORE THE CIT(A) STATED ABOVE AS WELL. WE DO NOT INTEND TO REPEAT THE SAME FOR THE SAKE OF BREVI TY. SUFFICE TO SAY THAT THE AFFILIATION FEE CANNOT BE CONSID ERED AS TAXABLE INCOME OF NON-RESIDENT SO AS TO ATTRACT TDS PROV ISIONS. THEREFORE, THE DISALLOWANCE U/S. 40(A)(IA) OF THE ACT DOES NOT ARISE ON THE FACTS OF THE CASE. AO IS DIRECTED TO ALL OW THE AMOUNT. 9. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JULY, 2018 SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER HYDERABAD, DATED 4 TH JULY, 2018 TNMM I.T.A. NO. 438/HYD/2017 :- 12 -: COPY TO : 1. CUSTOMER LAB SOLUTIONS PVT. LTD., HYDERABAD. C/O . S. PARTHASARATHI, ADVOCATE, 3/1, PRANAVA COMPLEX, 5 TH CROSS, MALLESWARAM, BANGALORE. 2. THE INCOME TAX OFFICER, WARD-1(2), HYDERABAD. 3. CIT(APPEALS)-5, HYDERABAD. 4. PR.CIT-1, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.