TMI Blog2012 (5) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... Affiliate Agreement being remitted to eCornell and the portion of the fees collected for providing enrolment infrastructure in order to access the study material by the students is retained by the assessee as its share. As such on facts the present case does not partake the nature of royalty as contemplated under Clause 3(a) of Article 12 of the Indo-US DTAA. It is again and again the same principle which has been applied namely that the intention of the parties can be gathered only from the agreement which has to be read as a whole. The said issue is not in dispute. On a careful consideration of the Affiliate Agreement along with Exhibits, we are of the view that the remittances made to eCornell (TILS) do not fall in the category of Royalty as considered in Clause 3(a) of Article 12 of the Indo-US DTAA. - Decided in favor of assessee. - IT APPEAL NO. 752 (DELHI) OF 2005 - - - Dated:- 9-3-2012 - SMT. DIVA SINGH, B.C. MEENA, JJ. Ajay Vohra and Neeraj Jain for the Appellant. N.K. Chand for the Respondent. ORDER Diva Singh, Judicial Member This is an appeal filed by the assessee against the order dated 1.11.2004 of CIT(A)-XXIX, New Delhi on the following gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cornel. Step 2: Student enters into an arrangement with HECL for obtaining the beneficial fee for the courses offered by Carnell and for using the infrastructure of HECL. Infrastructure shall include computers, modems etc. Access charges are separately payable to the extent of usage of connectively (telephone connection, gateway, broadband etc.) Total fee of Rs.1,65,000 is paid by the student to HECL in Indian rupees of which USD 2.100 is to be remitted by Carnell for the course content. Step 3: Student is registered by Carnell directly upon confirmation cashiering by HECL. Step 4: Student avails facilities provided by HECL's centre. HECL will provide the following facilities: Computers Modem Broadband access Telecom connectivity 2.2 The assessee put forth the following arguments in support of the contention that income earned by TILS is not taxable in India neither under the Income-tax Act, 1961 nor under the act of Indo-US Treaty for the following reasons: "The main contention of the assesses is that the income earned by TILS is for imparting of education online i.e. , from the activity of teaching and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to arrive at the above conclusion the said authority namely ADIT, Circle 2(2), International Taxation, New Delhi on considering the petition and the copy of the agreement signed between TILS and HCEL, took note of the fact that the assessee had been granted a limited, non-exclusive, non-transferable, non- sub-licenseable right and licence to market, promote, and provide certain ancillary services in connection with the offering and distribution of the courses by eCornell in the territory. Taking into consideration Clause 10 and Clause 11.2 and exhibit "G" of the agreement, it was concluded that payments received by eCornell would be in the nature of Royalty under DTAA between India and the U.S. The relevant portion extracted from the order reads as under:- "The assessee went into each of these parts and ruled them out one by one by arguing that its case does not fall within the ambit of any of these. However, on going through the copy of agreement signed between the TILS, which was doing business as eCornell and HECL, it is seen that the former had granted the latter a limited, non-exclusive, non-transferable, non sub-licenseable right and licence to market, promote, and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovals to HECL registration requests within 24 hours of receiving payment in full for such requests. In the field of marketing eCornell was supposed to provide the following: Registration: provide a co-branded web based registration interface for affiliate's use in making registration requests. Provide approvals to affiliate registration requests within 24 hours of receiving payment in full for such requests. Marketing: Provide US based sales collateral to be adapted at Affiliate's discretion. Provide guidelines for affiliate's use of eCornell's registered marks. Provide timely approvals for all Affiliate-developed marketing collateral. For Course Deliver eCornell was supposed to provide following: Provide Internet access to courses and support services to students for which affiliate has paid all course fees. Provide letters of completion to all students who complete course requirements in a satisfactory manner. Provide certificates or certifications to students who complete successfully all courses making up a certificates or certification program. From the above facts reflected in the agreement signed betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company had filed an application asking for a nil deduction of tax certificate. The appellant has entered into an agreement with TILS Inc. (eCornell) to market, promote and provide ancillary services in connection with providing distance learning courses offered by eCornell University to the students in India. The appellant stated that the payment made to eCornell is in the nature of business income and it is not liable to be taxed because the recipient does not have any PE in India. After examination of the agreement the Assessing Officer found that eCornell had granted the appellant a limited non-exclusive, non-transferable, non sub-licensable right and licence to market, promote and provide certain services in connection with the offering and distribution of courses by eCornell in the territory. It was also noticed by the Assessing Officer that eCornell grants to HECL the right and licence to use the eCornell trademarks, service marks, logos and other corporate indicia for the purposes of advertising and promoting the courses. It was also noticed by the Assessing Officer that eCornell was responsible for providing a co-branded web based registration interface for HECL;s use in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l has also granted limited non-exclusive non-transferable, non-sub-licensable right in connection with the offering and distribution of courses by eCornell. The appellant's arguments that there rights to use trademark etc. are free of charge is neither comprehensible nor it is mentioned in the agreement. As per clause 12 of DTAA any payment for use of the right to use any 'trademark' or any copyright will be Royalty. Considering the facts mentioned by Assessing Officer, agreement of the appellant and provisions of Article 12 of DTAA between USA India. It is clear that the payment made by the appellant is in the nature of Royalty and is liable to be taxed @ 15%. Therefore, Assessing Officer was justified in directing the appellant to deduct tax at source @ 15%. Therefore, Assessing Officer was justified in directing the appellant to deduct tax at source @ 15% as per DTAA. Accordingly, ground no.1 to 4 are dismissed. In the result, the appeal is dismissed." 5. Aggrieved by this the assessee is in appeal before the Tribunal. 6. Ld. A.R. reiterated the submissions advanced before the authorities below. The submissions advanced before the CIT(A) placed at pages 1 to 14 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement the SLP filed by the department has been dismissed. Reliance was also placed upon the order of the Delhi Bench of the Tribunal in the case of Career Launcher (India) Ltd. v. Asstt. CIT [2011] 131 ITD 414/10 taxmann.com 242 copy of which is placed in the paper book. It was argued that the assessee has not been given any right whatsoever in lieu of which the payments are being made. Referring to Clause 3 page 24 of the paper book which is affiliation agreement between the assessee and eCornell it was submitted that the affiliate would be solely responsible for promotion, marketing of the courses etc. within its territory and the expenses for the same would be met by the affiliate and the affiliate would provide certain marketing materials used to promote the courses in US which the affiliate can make use of in India or get it translated. Referring to the same Clause it was submitted that it was decided that the affiliate may refer to itself as "Authorised affiliate of eCornell", as such it was urged that all these terms, conditions and recitals in the Agreement demonstrate the fact that it is a case of pooling of resources by the two parties concerned wherein the responsibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made to eCornell by the assessee amounts to Royalty in terms of Article 12 of the Indo-US DTAA on account of the fact that eCornell has granted to HECL the right and licence to use the eCornell trademark, service mark, logos and other indicia. eCornell has also granted limited non-exclusive, non-transferable, non-sub-licensable right in connection with the offering and distribution of courses by eCornell. 8.1 It may not be out of place to refer to the terms recorded in the Affiliate Agreement entered into by the assessee with eCornel.. As per the written submissions titled as "Broad Propositions" filed before the CIT(A) placed at paper book pages 1 to 14 before us, Cornell University has been described as having been founded in 1865 in the New York State, offering courses in humanities, arts, science and social services. Cornell University offers variety of distance learning courses through Tower Innovative Learning Solutions Inc. (TILS) eCornell has been described as a wholly owned subsidiary company incorporated in USA and engaged in the business of creating, distributing and maintaining distance learning courses and providing related services. eCornell is further described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be construed as limiting in any manner ecornell's marketing, promotion, or distribution activities, directly or indirectly, with respect to the Course(s) in the Territory. 3. Promotion. Subject to the terms of this Agreement, Affiliate shall be solely responsible, at its expense, for the marketing and promotion of the Course(s) within the Territory. eCornell will provide Affiliate with certain marketing materials used to promote the Course(s) in the United States, which Affiliate; may use, whether in English or as translated by Affiliate, in order to fulfil its obligations under this Agreement. In connection with its marketing and promotion of the Course(s), Affiliate may refer to itself as an ["authorized affiliate of eCornell,"] or such other designation approved in writing by eCornell. Affiliate shall comply with any eCornell policies and guidelines regarding the type, nature and quality of any marketing or promotional materials regarding the Course(s) and/or displaying an eCornell Mark (as defined below). In the event that eCornell objects to any such marketing or promotional materials, Affiliate shall immediately cease distributing such materials unless and until other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide: (i) a reasonable number of computers equipped with broadband connections to the Internet; and (ii) a reasonable number of personnel capable of providing enrolled students and prospective students with English-language support to assist such students in enrolling and participating in the Course(s). Affiliate shall promptly report to eCornell any suspected or actual performance issues relating to the Course(s) of which it becomes aware, regardless of whether such performance issue is material or immaterial or whether discovered by Affiliate or a student. Without limiting the foregoing, Affiliate shall also furnish the mutually agreed upon ancillary services set forth in Exhibit C in connection with the Course(s). 5.2 eCornell Obligations. eCornell will provide students and prospective students with support services that are substantially similar in all material respects to the support services provided to students enrolled in other online courses made available by eCornell (except as eCornell's provision of any such services may be affected by any translation assistance that eCornell may require). 6. Fees and Payment. 6.1 Invoice. On the 12th of each month during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) all copyright, patent, trademark, service mark, trade secret, and other intellectual property or proprietary rights relating thereto. Affiliate acknowledges and agrees that, except for the limited rights granted under this Agreement, nothing herein affects any transfer of any right, title or interest in or to the Course(s) or eCornell Marks from eCornell to Affiliate or any third party. Affiliate shall not remove any copyright notice, trademark notice, or other proprietary legend displayed on or in connection with the Course(s) or eCornell Marks. Affiliate shall use best efforts to protect eCornell's rights in and to the Course(s) and eCornell Marks and shall cooperate with eCornell in order to protect such rights. Affiliate shall also promptly report any infringements or potential infringements of the Course(s) and eCornell Marks of which it is aware. 9. Term and Termination. Term. This Agreement shall be in effect as of the Effective Date and, unless otherwise terminated in accordance with the terms of this Section 9, shall remain in effect for a period of two (2) years thereafter (the "Term"). Each party shall consult with AHEd regarding any renewals of this Agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tten guidelines and policies relating to the use of such marks which e-Cornell shall provide to affiliate from time to time. Affiliate shall not use any e-Cornell marks in any manner likely to confuse, mislead, or deceive the public, or to be adverse to the interests of e-Cornell. Affiliate will cease using any e-Cornell Mark on any materials, whether tangible, or intangible, immediately upon receipt of written notice from e-Cornell to cease such use. 10.2 Ownership. Affiliate acknowledges that e-Cornell and its licensors are the exclusive owners of the eCornell Marks, any trademark incorporating all or any part of any eCornell mark, and the trademark rights created by the use of the eCornell marks. All uses of the validity or ownership of any of the eCornell marks. 10.3. Additional Restrictions. Except as otherwise expressly permitted by this Agreement or with the prior written consent of eCornell in each instance: (i) Affiliate will not use any eCornell Mark, or any mark incorporating all or any part of any eCornell Mark, on any business sign, business card, stationery, or form, or use any eCornell Mark as the name of Affiliate's business or any division thereof; and (ii) Aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally known institutions of higher education; ( f ) in its performance of its obligations hereunder, it and its directors: (i) shall comply with all applicable Corrupt Practices Laws; and (ii) shall conduct its business and operations in compliance with all applicable Corrupt Practices Laws. For purposes of this Agreement "Corrupt Practices Laws" shall mean collectively, the United States Foreign Corrupt Practices Act of 1977 (Pub. L. No. 95-213, 101-104), as amended, and any other law, rule, regulation, order, decree, or directive having the force of law and relating to bribery, kick backs, or similar business practices; and ( g ) it has obtained all consents, authorizations, permits, licenses, order and approvals of (and all filings and registrations with) any governmental authority located in the Territory and [insert country of Incorporation] that are required by law with respect to the execution, delivery, and performance of this Agreement by the parties hereto and the consummation of the transactions contemplated by this Agreement. 11.2. eCornell: The course(s) are subject to the warranty provisions of the End User Agreement. Any other warranty made by Affiliate sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning, signboards, earth pits and power conditioning * Personal computers * 1 very small aperture terminal (VSAT) with receive and transmit capability and any other communication facility, as may be suitable for the learning to take place. 2. Adequate backups shall be put in place so that the registered program participants have a good classroom experience. In particular backups shall be provided as follows: * Each classroom shall have an UPS of adequate rating to ensure that the PCs and VSAT remain operational even during power cuts, * Spares for the VSAT shall be provisioned locally (either at a HECL office or at the classroom location) so that a minimum VSAT uptime of 98% is maintained. * At least 10% extra PCs, loaded with required software, shall be provisioned at the classrooms so that registered program participants have easy access to backup machines, should their allocated machines fail. 3. In the event a scheduled session is cancelled for whatever reason, it shall be HECL's responsibility to reschedule the same and communicate the changed schedule to all affected registered programme participants. 4. In case of classrooms which are franchised out by HECL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l shall perform and be responsible for the following: Registration: To provide a co-branded web-based registration interface for affiliate's use in making registration requests. Provide approvals to affiliate registration requests within 24 hours of receiving payment in full for such requests. Marketing: Provide US-based sales collateral to be adapted at Affiliate's discretion. Provide guidelines for affiliate's use of eCornell's registered marks. Provide timely approvals for all Affiliate-developed marketing collateral. Course Delivery: Provide Internet access to courses and support services to students for which affiliate has paid all course fees. Provide letters of completion to all students who complete course requirements in a satisfactory manner. Provide certificates or certifications to students who complete successfully all courses making up a certificates or certification program. 8.10 On a careful perusal of the terms and conditions recorded in the Affiliate Agreement entered into with TILS (e-Cornell) by the assessee, it is eminently clear that Whereas eCornell is to impart education to the student ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The above mentioned clauses in the Affiliate Agreement read with the Exhibits to the said agreement fully set out that eCornell owns the rights, title and interest in and to the courses and the user of eCornell marks and all copyrights, patent, trademark, service mark, trade secrets and other intellectual property or proprietary rights relating thereto remain vested in eCornell and except for limited rights granted under the agreement to register the students affiliate acknowledges that nothing therein will effect any transfer of any right, title or interest in or to the courses or e-Cornell marks from e-Cornell or to affiliate or of any third party and the affiliate shall not remove any copyright notice, trademark notice, or other proprietary legend displayed on or in connection with courses or e-Cornell marks. Clause 10 along with 10.1/10.2 and 10.3 refers to e-Cornell marks, certain permitted uses, ownership, additional restrictions whereby the affiliate had been granted limited right and licence to use eCornell trademarks, service marks, logos and other indicia (collectively referred to as eCornell) for the purpose of advertising and promoting the courses. Accordingly on a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is placed by the assessee. "ARTICLE 12: Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fess for included services is a resident of the other Contracting State, the tax so charged shall not exceed: ( a ) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph]: ( i ) during the first five taxable years for which this Convention has effect, ( a ) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and ( b ) 20 per cent of the gross amount of the royalties or fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees attributable to eCornell as per the Affiliate Agreement being remitted to eCornell and the portion of the fees collected for providing enrolment infrastructure in order to access the study material by the students is retained by the assessee as its share. As such on facts the present case does not partake the nature of royalty as contemplated under Clause 3(a) of Article 12 of the Indo-US DTAA. 9. We now propose to discuss the case law which has been referred to by the parties before the Bench for our consideration. 9.1 Transmission Corpn. of A.P. Ltd's case ( supra ). The said judgement has been relied upon by the Revenue. A perusal of the same shows that it holds that S.195 of the Income-tax Act, 1961 provides for deduction of tax at source subject to regular assessment. It lays down that the purpose of sub-section (vi) of section 195 is to see that on the sum which is chargeable u/s 4 of the Act for levy and collection of Income-tax Act, 1961 the payer should deduct income tax thereon at the rates in force if the amounts is to be paid to a non-resident. The said provision is for tentative deduction of tax thereon subject to regular assessment and by deduction of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was a public limited company engaged in computer education and training. It also provided the student services through its franchisee under a licence and were provided with the course content. Infrastructure was to be provided by franchisee who were running the training centre under assessee's brand name. The fees collected was shared between the franchisee and the assessee as per the clauses of the agreement. It was held that the dominant intention of the parties was to conduct business and not mere letting out of the building, furniture and fixtures. It was the composite agreement which was to be seen and the essence of the agreement was to conduct the business of running educational centres jointly. As such the broad objective of the Agreement was to share revenue and not to hire the premises provided by the assessee. In the facts of the said case the administrative control of the education centre was with franchisee who were responsible for marketing the courses admitting the students conducting the classes and perform all other administrative functions relating to the education centre. The assessee in the present proceedings has placed reliance upon the finding in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x at source as required u/s 195 of the Act. On appeal their Lordships in the said judgment dismissed the departmental appeal. A perusal of the same shows that their Lordships have taken note of M.A. Pai Foundations v. State of Karnataka [2002] 8 SCC 481 and CIT v. Mahindra Mahindra Ltd. [2003] 263 ITR 481/132 /Taxman 30 (Bom.) and thus held that it is no longer in dispute that imparting education can no longer be treated as a business. 9.5 Reliance also has been placed on the order of the Coordinate Bench in Career Launcher (India) Ltd's case ( supra ) copy of which is placed before the Bench. A perusal of the same shows that the assessee therein was carrying on the business of running coaching classes for admission of students to professional courses. In the course of this business it had also entered into agreements with various persons desirous of running similar coaching classes on the basis of standardized agreement. The agreement allowed the franchisees were to use the trade name, trademark and course material belonging to the assessee. However other arrangements such as finding suitable premises, enrolling students, collecting fees etc. were made by the franc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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