Withholding of taxes on use of Foreign Education Institutionbrand name

Issue of the Case:

• International Education and Research, Foundation (hereinafter referred to as “the Assessee”) is engaged in the running of an educational school, under the name of “Mahatma Gandhi, International School”. During the course of proceedings u/s 201 of the Act the Assessing Officer (AO) observed that foreign remittances were made by the Assessee to various foreign educational institutions under different heads like evaluation fees, authorization fees, other item – workshop/training charges, other item – study, material, fees for enrolment/registration fees etc. Out of various payments made by the Assessee, some payments were made on per student charges like evaluation fees, per teacher charges, training charges. However, other charges like annual program payments were not based on per student, rather they were one-time payment made annually.

• During the course of proceedings, the AO observed that the foreign educational institutions viz. IBO/University of Cambridge have registered themselves in India under the Trademarks Act, 1999 and were receiving the payments on per student as well as on annual fees basis. However, the Assessee failed to submit the basis of such annual payments during the course of proceedings.

• Further, the AO observed that the course materials have been designed by the aforementioned foreign institutions. Along with, they were also providing the study material and guidance to the Assessee. Accordingly, the foreign institutions were providing services related to use and application of trademarks and hence such payments are taxable in India as royalty. Since, authorization to use trademarks has been given to the Assessee, the Assessee was liable to withhold taxes on such overseas payment under Section 195 of the Act.

• Aggrieved by the order of AO, the Assessee preferred an appeal before CIT(A) however, CIT(A) also upheld the findings of AO during the course of proceedings. Aggrieved by the same, the Assessee further appealed before ITAT.

• Now, ITAT has to adjudicate whether the Assessee was correct in his action in not withholding the taxes on foreign remittances made to foreign institutions being in the nature of royalty or such remittances?

Observations of ITAT:

• The students are attracted to enroll for the courses offered by foreign educational institutions on the basis of reputation carried by them and therefore, it cannot be simply said that the use of brand name of such foreign educational institutions is only “incidental” to the payments made by the Assessee to them and such payment is only for authorization granted by these institutions to attract students to enroll with the courses offered by them via the medium of the Assessee.

• These institutions have also applied for registration under Trademarks Act, 1999 with a view to ensure that their brand name/trademark is not exploited by any other entity/person in India and with a view to protect their trademark / brand name in India.

• The Assessee has not been able to give any basis for the lump sum payment made by the Assessee to the international educational institutions. Further, the invoice that has been issued by these institutions to the Assessee, a certain discount has also been offered to the Assessee. However, no explanation was offered in respect to, on what basis discount has been offered to the Assessee by these institutions on such annual payment.

• Accordingly, the matter was restored back to the AO for re-examination of the facts to understand the basis on which a lump sum fee has been charged by the overseas entities from the assessee and also the basis for allowing/affording discount to the Assessee, because without analyzing the basis of invoice raised by such foreign educational institutions on the Assessee, no one can come to the conclusion whether these payments qualify as a “royalty” payment or not.

Lakshay Prakash Jonwal, Direct Tax Associate, SW