TMI Blog2008 (7) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... jay Singh) The application under section 245Q (1) of the Income-tax Act, 1961 (in short the Act) has been filed by M/s Cushman Wakefield(S) Pte. Ltd., Singapore (in short, CWS), seeking advance ruling from the Authority on the questions mentioned therein. 2. Facts: Briefly stated, the applicant, a foreign company incorporated and based in Singapore, offers a full range of real estate services to its local and international clients. As stated in the statement of facts, Cushman Wakefield India Pvt. Ltd.(in short, CWI) is, a wholly owned subsidiary of Cushman Wakefield Mauritius, which, in turn, is a subsidiary of Cushman Wakefield, Asia. The applicant is, as per averment, engaged in the business of rendering services in connection with acquisition, sales and dealings in real estate and other services such as advisory research facilities management, project management etc. in the field of real estate. The applicant states that it has also developed certain international client relationships and in accordance with the global policy, various offices provide referral services to other Cushman and Wakefield (C W) offices, wherein one C W Office would refer client t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the answer to question (iii) above is in the affirmative, whether the whole or any part (if yes what proportion) of referral fee could be attributed to India in terms of explanation to Section 9(1)(i) of the Act and would constitute income accruing or arising in India? v. If the referral fee is held to be taxable, whether the same can be classified as Royalty under section 9(1)(vi), fee for technical services under section 9(1)(vii), or "income from business or profession" under the Act read with the Double Taxation Avoidance Agreement between India and Singapore and what is the rate of tax applicable? vi. Whether the applicant can be said to have a Permanent Establishment in India in having regard to the provisions of the Double Taxation Avoidance Agreement between India and Singapore by virtue of its agreement with Cushman Wakefield India Pvt. Ltd.? vii. If the answer to 6 above is in affirmative, whether the whole or any part thereof (if so what part) can be attributed to the Permanent Establishment? 4. While commenting on the admissibility of the application, the Director of Income-tax (International Taxation) New Delhi has sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to a property transaction in Pune, India. Brief Arguments - Revenue's 9. Commenting on the documents/correspondences in the shape of e-mails relating to the transactions as referred to above, the representative of the Revenue contended that the applicant has not been able to furnish clear and specific documents, other than a few cryptic e-mails, which can go to establish or even demonstrate the rendition of any 'referral service' to CWI. In respect of Symantec transaction, the applicant has stated that the client referral has been made by one Ms Melissa Rouse who, on close scrutiny, has turned out to be an employee of an entity incorporated in Washington. Regarding the Thomson transaction, even the cryptic e-mails have not been filed and the revenue has contended that much confusion persists about the Perot systems transaction also. It is the CWI which seems to have interacted with its clients and provided services to them on its own and only the copies of e-mails seem to have been marked to CWS, presumably to keep them (CWS) informed of the goings-on, contends the Revenue's representative. 10. Arguing further, the revenue has contended that the smokescre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Melissa Rouse had referred the transaction on behalf of the applicant in consonance with the management norms of the Global client solution Team. An affidavit to this effect has also been filed by one Mr. Ashpreet Chaudhary, Managing Director of CWS. Similarly, about the Thomson Transaction and the Perot Systems transactions, it has been submitted that these transactions should also not be eyed with suspicion because the message of the 'referral' having been made clearly floats to the surface from the communications. However, there are situations which give way to oral references also and Thomson's is one such. 14. The Revenue's allegation regarding non-rendition of any referral service by CWS has also been stoutly disputed by the learned counsel for the applicant. The referral has, as argued, paved the way for substantial gain of income to CWI who have offered the same to tax. Papers have also been filed to indicate the fact that the referral fee received by the applicant is liable to tax in Singapore. Besides, the raising of invoices by CWI, indicating payments of referral fee, has also been confirmed by the Revenue, contends the learned counsel. It has, accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment (PE) in India, as defined in Article 5 of the Treaty. 16. Assailing the stand of the Revenue about the taxability of referral fees received by applicant as royalty income, the learned counsel has tried to drive the point home that by no stretch of imagination, the receipt can be characterized as royalty, as it is not a consideration for 'imparting of any information concerning technical, industrial or commercial or scientific knowledge, experience or skill' as laid down in section 9(1)(vi) read with Explanation 2(iv) of the Act. It is also not royalty as per the definition given in Article 12(3) of the DTAA between India and Singapore. To buttress her arguments, the learned counsel led us through the provisions of the section 9(1)(vi), Explanation 2, and also to the relevant provisions of Article 12(3) of the Treaty. Reliance has been placed on the decisions in the case of CIT vs H.E.G. [263 I.T.R. 230 (M.P.)] and in the case of Ceat International vs. CIT [237 I.T.R. 858 (Bombay)]. In support of her contentions, Ms. Anita Sumanth also placed reliance on OECD Commentary to the effect that the said receipt of the referral fee cannot be termed 'royalty'. As contend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Singapore on the same income and the absence of patent improbability in the applicant's version from its business point of view are the other factors that persuade us not to reopen the order passed under S.245-R(2) of the Act. 20. Though in the application several questions relating to the taxability of amount of 'referral fee' have been raised, the rival contentions of the parties give rise to the following points for determination:- (a) Whether the referral fee received by the applicant from CWI can be characterized as business income, or income by way of Royalty, or income by way of Fees for technical services (FTS) as per section 9(1)(i), 9(1)(vi) and 9(1)(vii) of the Act read with the DTAA? (b) Whether the applicant has a P.E. in India and if so, what part of income of the applicant can be attributed to such P.E.? (c) Whether any tax is liable to be deducted by CWI from the payment of referral fee to the applicant and, if so, at what rate? 21. It will be appropriate, in the first instance, to examine whether the receipt (referral fee) is taxable or otherwise under section 5 (2) and section 9(1)(i) of the Act. To appreciate the point at issue, it will be q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through transfer of a capital asset situate in India. [Explanation 1]- For the purpose of this clause- (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; Clauses (b), (c) (d) - xxx xxx xxx Explanation 2; For the removal of doubts, it is hereby declared that "business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident; (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation between a business carried on by a non-resident which yields profits or gains and some activity in [India] which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in [India]: a stray or isolated transaction is normally not to be regarded as a business connection….The expression "business connection" postulates a real and intimate relation between trading activity carried on outside [India] and trading activity within [India], the relation between the two contributing to the earning of income by the non-resident in his trading activity.' Based on the above touchstones, it emerges that, in the instant case, there does not exist a real and intimate relation between the trading activities carried on outside India by a non-resident (the applicant) and the activities in India which contributed to the earning of income. As stated, the applicant does not have any activities in India except that of making a referral to Indian associate company (CWI) from Singapore. Besides, it has also been emphasized that it is the prerogative of the prospective customer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of, a patent, invention, model design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; [(iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and] (v)." xxx xxx xxx 26. Based on the above definition of royalty as embedded in Explanation-2 to Section (9)(1)(vi) of the Act, the Revenue, as already noted, has placed reliance firstly on clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions; inasmuch as it is derived from experience, know how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique". Further, in Memorandum to the Indo-US Treaty in the context of Article 12(3), containing identical wordings, relating to 'consideration for information concerning industrial, commercial or scientific experience', the following observation has been made:- "The term "information concerning industrial, commercial, or scientific experience" alludes to the concept of know-how and means information that is not publicly available and that cannot be known from mere examination of a product and mere knowledge of the progress of technique. As provided in the Commentaries on the Articles of the OECD Model Convention (paragraph 12 of the Art. 12 Comm.): "In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public". 28. From the above discussion, the inescapable inference is that consideration for information concerning industrial, commercial and scientific exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 2. The plea of Revenue about the 'brand' royalty has thus no legal foundation in the given set of facts. 30. We shall now proceed to consider the question whether the receipt of referral fee is income by way of FTS within the ambit of section 9(1) (vii) read with Article 12(4) of the DTAA. For the sake of convenience, it would be quite relevant to extract these provisions which read as follows:- 9(1) The following income shall be deemed to accrue or arise in India: (i) xxx xxx xxx (ii) to (vi) xxx xxx (vii) income by way of fees for technical services payable by - (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided xxx xxx xxx Explanation 1: xxx xxx Explanation 2: For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . An attempt has been made by the learned departmental representative to bring the referral fee within the description of managerial or consultancy services falling within the scope of Explanation 2 to Section 9(1)(vii). There is no need to go into the merits of this contention. Assuming that managerial or consultancy services are involved in the present case, as the applicant has sought benefit of the treaty we have to see whether such payments are FTS as per Article 12(4)(b) of the treaty, which lays down that services of such managerial, technical or consultancy nature can be FTS only if such services 'make available' technical knowledge, experience, skill, know-how or processes, which enables the person obtaining the services to apply the technology contained therein. In the instant case, no expertise, or know-how has been 'made available' to CWI by reason of rendering service of the said description. We are of the view that transmission of the technical knowledge, experience, skills etc. from the person rendering the services to the person utilizing the same is contemplated by the Article. Further, some sort of durability or permanency of the result of 'rendering of service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that the impugned receipt of referral fee is not chargeable to tax under the provisions of the Act or under the provisions of the Treaty on the basis of facts stated in the application. If that be so, section 195 of the Act will not be attracted. 34. In the light of the above discussion, we rule on questions as under:- Que. No. (1) That on the facts and in the circumstances of the case the receipt on account of the referral fee arising to the applicant would not be taxable in India having regard to the provisions of the Act and the provisions of the DTAA either under the head business income, or royalty income or income by way of FTS. Que. No. (2) On the facts and circumstances of the case and in view of ruling on question No.(1) above, the payer is not required to withhold any tax under section 195 of the Act, while making remittance to the applicant. Que. No. (3) On the facts and in the circumstances of the case, the applicant does not have a 'business connection' in India under the provisions of the Act. Que. No. (4) In view of ruling on question No.(3) above, this question, being academic, requires no ruling. Que. No. (5) This question requires no ruling ..... X X X X Extracts X X X X X X X X Extracts X X X X
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