In a recent case, the Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) held that the services rendered for product certification, which include evaluating technical quality and issuing certificates, do not fall under the definition of Fees for Technical Services as per Section 9(1)(vii) of the Act.
Elitecore Technologies Pvt.Ltd, the assessee is primarily engaged in the business of development of software product. It had paid Product Certification Expenses to non-resident company and submitted before AO that the company is required to get its software product certified from various authorities for which product certification charges have been paid.
The services include measuring and evaluating technical quality of the software product against standardized set of quality criteria against which certificate is issued. The sum is paid for AES Interoperability test which assures VPN users that IPsec systems are generally interoperable with other IPsec systems when using the new AES encryption algorithm.
It was submitted that the services relate to certifying/ registering the product. The services have been availed from parties outside India viz. USA, UK, Korea and China. Hence, as per Section 90(2) of the Act, applying beneficial provisions of the tax treaty, it is submitted that the services rendered to ETPL are not technical nature and hence, the payments made are not covered within the definition of Fees for Technical Services as provided under the respective treaties.
It was argued that in absence of fixed place of business of such parties in India, the payment made to them is not chargeable to tax in India even as business income. The AO was not satisfied with the reply and concluded that since the income derived by these parties, to whom payment was made, is from the source in India, in terms of provisions of section 5(2)(b) of the Act, this income is deemed to accrue or arise in India and since the assessee has failed to withhold tax under section 195(2), added back under section 40(a)(i) of the Act.
The two-member Bench of T.R. Senthil Kumar (Judicial Member) and Makarand V. Mahadeokar (Accountant Member) observed that the royalty is payable to the vendor only upon the activation of the software by the end user, which creates a time gap between the provision made by the assessee and the actual activation by the end user.
The Tribunal viewed that the provision for royalty expenses is made at the time of recording sales, but the actual payment is not immediately due to the third-party vendor as the end user has not yet activated the software.
The ITAT deleted the additions made by AO under section 40(a)(i) while concluding that the payments are not liable for withholding tax under section 195 and dismissed the appeal.
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