Payments by Deloitte India to UK arm for brand, tech, and communication services are not 'Royalty' under India-UK DTAA: Mumbai ITAT - 2025-01-17

Deloitte India's Payments for Shared Global Services Not Taxable as 'Royalty', Rules ITAT

Mumbai, January 17, 2025 – In a significant ruling for multinational service firms, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that payments made by Deloitte's Indian member firms to their UK-based global entity for shared services do not constitute 'royalty'. The Tribunal affirmed that such payments are not subject to Tax Deducted at Source (TDS) under the India-UK Double Taxation Avoidance Agreement (DTAA).

The decision, delivered by a bench comprising Vice President Shri Saktijit Dey and Accountant Member Ms. Padmavathy S, dismissed appeals filed by the Income Tax Department against Deloitte Touche Tohmatsu India LLP and Deloitte Haskins Sells LLP for the Assessment Year 2018-19.

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Background of the Case

The dispute arose after the Indian Deloitte firms sought to remit payments to Deloitte Global Holdings Services Limited (Holdings), a UK-based entity, for a range of shared services without deducting tax. These services, governed by a "Shared Services Agreement," are designed to foster international alignment, cooperation, and high professional standards across the Deloitte global network. Holdings operates on a break-even basis, recovering costs from member firms without any markup.

The Assessing Officer (AO), however, classified payments related to three specific categories—

1) Global Brand,

2) Global Communications, and

3) Global Technology/Knowledge Management —as 'royalty'. The AO contended these were payments for the use of computer software or literary work and mandated TDS. This view was initially upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who reasoned that the payments were for "information concerning commercial experience" under Article 13(3) of the India-UK DTAA.

Subsequently, the CIT(A), following a binding decision by a coordinate ITAT bench in Deloitte's own case for previous years, allowed the assessees' appeal. The Revenue then challenged this decision before the ITAT.

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Arguments of the Parties

The Revenue relied on the original order of the Assessing Officer, arguing that the payments fell squarely within the definition of royalty.

Deloitte’s counsel argued that the ITAT had already settled the identical issue in the firm's favour in a detailed order dated July 27, 2022. They maintained that the services provided by Holdings were for internal alignment and support, not for the use of any intellectual property or confidential commercial information that would attract the royalty clause.

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Tribunal's Analysis and Precedents

The ITAT extensively relied on the reasoning of its coordinate bench in the earlier case, which had systematically dismantled the tax department's contentions. The key findings from that precedent, which the current bench adopted, were:

• No Right to Use Copyright: The services provided were for internal guidance, policy implementation, and collaboration. There was no transfer of any copyright, patent, trademark, or secret formula. With respect to technology, Holdings merely provided access to licensed software procured from third-party vendors for internal use, which constitutes a transfer of a "copyrighted article" and not the copyright itself.
• Not 'Information Concerning Commercial Experience': The Tribunal noted that the services were purely for internal use within the Deloitte network to ensure consistency and quality. As Holdings does not deal with third-party clients, the information shared is not related to external commercial experience that could be exploited.
• Reliance on Supreme Court Precedent: The Tribunal highlighted that the AO's original order had heavily relied on the AAR ruling in EY Global Services Ltd. That ruling, however, was subsequently overturned by the Delhi High Court, following the landmark Supreme Court judgment in Engineering Analysis Centre of Excellence (P) Ltd. v. CIT . The Supreme Court clarified that for a payment to be royalty for software, there must be a transfer of rights as defined under the Copyright Act, 1957, which was not the case here.

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Key Excerpts from the Judgment

The Tribunal quoted the coordinate bench's findings, which stated:

"From a bare perusal of aforesaid activities, it cannot be held that it is for use of or right to use of any copyright of literary, artistic or scientific work... Further, it also cannot be held for information concerning industrial or scientific experience and/or for commercial experience because the basic underlying fact is that it is purely for internal use of member firms and not for any third party or any client."

Concluding its analysis, the current bench held:

"Considering the fact that the appeal is arising out of the same order of the AO... and that the CIT(A) has also relied on the above order of coordinate bench, we are of the view that the above decision of coordinate bench is applicable for the appeals before us... Accordingly respectfully following the above decision we hold that Deloitte... are not liable to deduct tax source on payments made to Deloitte Global Holdings Ltd. as the impugned payments do not fall within the scope and definition of Royalty under Article 13(3) of India UK DTAA."

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Final Decision and Implications

The ITAT dismissed the Revenue's appeals, providing a significant victory for Deloitte and reinforcing a crucial principle for multinational corporations operating in India. The ruling clarifies that cost-sharing arrangements for intra-group services aimed at internal support and brand consistency do not automatically qualify as royalty payments, especially when no intellectual property rights are transferred. This decision is expected to serve as a key precedent for similar cases involving shared service costs in global professional networks.