Affiliation Fee paid to US Company not ‘ Royalty ’ as per DTAA: ITAT [Read Order]

The Hyderabad bench of the Income Tax Appellate Tribunal ( ITAT ) in Customer Lab Solutions Pvt. Ltd v. ITO held that the payment of Affiliation Fee would not amount to payment of royalty as per the Double Taxation Avoidance Agreement (DTAA) between India and USA.

Assessee had entered into an agreement with M/s. Balanced Scorecard Collaborative Inc. of USA for the purpose of its consultancy business and accordingly paid a sum of Rs. 12,44,072/- as fee. While completing the assessment, the Assessing Officer disallowed the amount on the ground that no TDS has not been deducted. He was of the view that the fee paid as royalty within the meaning of section 9(1)(vi)(b) of the Act.

The Tribunal noticed that the affiliation fee is one-time payment which does not provide 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 on changing economic conditions.

The bench observed that “The annual fee does not provide for any transfer of technology. However, there is further fee to be paid “Fees on consulting and reports” in para 4 of the agreement. This fee will be paid based on the performance, targets achieved by assessee in consulting technology, tools etc. What assessee has paid and claimed was only an affiliation fee and not the fee on consulting and reports. Since the payment of affiliation fee does not involve any transfer of technical knowledge or use of technical knowledge, the entire case law relied upon by the Ld.CIT(A)/AO does not apply to the facts of the case.”

“Since there is no transfer of technology or use of any technology and payment is only simply for affiliation, the above amount cannot be considered as ‘royalty’ either under the provisions of Income Tax Act or under the provisions of DTAA,” the bench said.