In a significant ruling in the case of ONGC, the Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has ruled that TDS liability does not arise in the absence of use of patent or copyright against royalty paid.
The assessee, Oil and Natural Gas Corporation Limited is a Central Public Sector Undertaking which agreed with the University of Texas at Austin, USA to carry out research activity in collaboration with the assessee for the development of suitable chemical Enhanced Oil Recovery (EOR) formulations for its 5 reservoirs.
The assessee agreed to pay a sum of USD 0.99 million for each reservoir which comes to USD 4.95 million in aggregate for the services to be availed. The assessee applied for an order u/s 195(2) of the Income Tax Act to the ITO Int. Tax, to determine the proportion of sums chargeable to tax on which tax was required to be deducted. The AO directed the assessee to deduct the TDS @ 10% on gross payments to be made to the University of Texas at Austin, USA vide an order dated 19-07-2018.
From the statutory provisions of section 9 of the Act and the relevant clauses of article 12 in the DTAA, it was clear that there was a marked distinction between royalty and fees for technical services and states that royalty amounts to consideration for transfer of or any rights or imparting of information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property.
It was observed that if he was able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge was made available.
From the agreement between the assessee and the University of Texas at Austin, USA, defining the scope of work the Tribunal observed that there was neither any patent/copyright used by the assessee against which the royalty was paid nor there was any technical know-how which was made available to the assessee.
Shri Mahavir Prasad, judicial member and Shri Waseem Ahmed, accountant member held that “there is no liability on the assessee to deduct the TDS in pursuance to Article 12 of India-USA DTAA. As such the agreement was entered between the assessee and Texas there remains no ambiguity to the fact that there was any royalty payment made by the assessee or any technical know-how was received by the assessee.”
The Tribunal set aside the finding of the CIT-A and directed the AO to delete the addition made by him. The appeal filed by the assessee got allowed. Shri Mohd. Farid appeared for the assessee and Shri Mohd. Usman with Shri Purushottam Kumar appeared for the revenue.
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