TMI Blog2013 (9) TMI 412X X X X Extracts X X X X X X X X Extracts X X X X ..... e fresh conclusions on a quality of services rendered by the assessee under the new contract and they constitute technical services for qualifying the provisions of Article 13 of the India UK Tax Treaty. Additional Evidence - Assessee filed certain invoices in the form of additional evidences to demonstrate the above facts for the first time before us. As per the assessee, these papers were not asked for by the AO, therefore, they were not filed. We find no reason to disbelief the arguments of the assessee in this regard. In our opinion, considering the provisions of Rule-29 of the ITAT, admitting these papers would help for passing a proper assessment order and will enable Assessing Officers to go into the facts in the right perspective as to whether the grading services include inscription services or not. Accordingly, we set aside the order of the AO and the DRP on this issue and remand the matter to the files of the AO for fresh adjudication after considering the additional evidences and the decisions of the Bombay High Court in the case of Diamond Services International (P) Ltd (supra), wherein it was held that the grading fees paid by the assessee to Gemological Institute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 percent on gross basis as per Article 13 the India-UK tax treaty instead of 10 percent as per the provisions of sub clause (AA) of clause (b) of sub-section (1) of section 115A of the Act. 5. The AO erred in treating the receipts from DTC Accredited Business Services as Fees for Technical Services and Royalty under Article 13 of the India-UK tax treaty. 6. Without prejudice to ground no.5, the AO erred in taxing the receipts from DTC accredited business services at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (BB) / (AA) of clause (b) of sub-section (1) of section 115A of Act. 7. The AO erred in applying the tax rate of 15 percent to royalty income received from Forevermark on gross basis as per Article 13 of the India- UK tax treaty instead of 10 percent as per the provisions of sub clause (AA) of clause (b) of sub-section (1) of section 115A of the Act. 8. The AO erred in charging the interest u/s 234B of the Act. 9. The AO erred in charging the interest u/s 234A of the Act. 10. The AO erred in law and on facts in initiating penalty proceedings u/s 271(1)(c) of the Act." 3. Asss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roneously charged the tax @ 15% in respect of the Value Added Services (VAS), grading services, DTC Accredited Business Services as Fees for Technical Services and Royalty, income received from Forevermarket. In this regard, Ld Counsel read out the contents of para 10 of the order of the Tribunal. Further, Ld Counsel brought our attention to para 6, 6.1 and 6.2 of the said Tribunal‟s order and mentioned that the issues and arguments stand applicable and the decision taken by the Tribunal in favour of the assessee becomes applicable to the grounds under consideration. 5. On the other hand, Ld DR dutifully relied on the order of the AO. 6. We have heard both the parties and perused the said para 6, 6.1 and 6.2 as well as para 10 of the Tribunal‟s order for the AY 2007-2008 and find that an identical issue came up for adjudication by the Tribunal in the AY 2007-08. Like in the present case, AO applied the rate of 15% in accordance with the Article 13 of the India-UK Tax Treaty while charging certain receipts to tax. Relevant facts are available in Para 6, 6.1 and 6.2 of the order of the ITAT, supra and they relate to taxing of "marketing contributions" which are assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efully. The dispute is regarding the rate to be applied in case of marketing contribution which has been taxed by the AO as royalty. There is no dispute that the marketing contributions had been received by the assessee as per agreement dated 8.11.2005 a copy of which has been placed in the paper book at pages 1-22. The AO had treated the marketing contribution as royalty both under the provisions of domestic law as well as under DTAA which is clear from the assessment order. The taxability of income from international transactions has to be considered, both under the domestic law as well as under DTAA because the assessee would be entitled to the benefits of the treaty only if the sum is taxable under the domestic law. In case, the sum is not taxable either under the domestic law or under the DTAA, it cannot be taxed at all. If the amount has been found taxable under both the provisions, the assessee will be entitled to the beneficial rate of tax under the provisions of section 90(2). Since, in this case, the marketing contribution has been received in terms of agreement dated 8.11.2005 which is obviously after 1.6.2005, the tax rate of 10% is applicable under the provisions of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the relevant conclusions of the AO/DRP are set aside and the said grounds 2, 4, 6 7 are allowed in favour of the assessee. Now we shall take up the rest of the grounds 1, 3, 5, 8. 9 to 10 in the succeeding paragraphs of this order. 9. Ground no.1 relates to taxability of "receipts from Supply Planning Services" (termed as VAS‟) as Fees for Technical Services (FTS) under Explanation- 2 to section 9(1)(vii) Income Tax Act, 1961 as well as under para 4 of the India-UK Tax Treaty and also as royalty under the provisions of para 3 of the Article 13 of the India-UK Tax Treaty. Relevant facts are that the assessee entered into Sightholder Contract 2008-2011 in the name of "Supplier of Choice, Sightholder Contract 2008-2011" (in short assessee described it as SPS agreement). Sightholder Contract 2005-2008 (in short assessee described it as VAS agreement) was in force prior to this period. 10. The SPS agreement (placed at page 1 of PB described as "DTC Sightholders Contract 2008-9011 (Supplier of Choice Agreement)" deals with policy statement, the criteria and considerations, notes to the criteria and considerations, sight terms and conditions of sale for London Sights, sigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion that the VAS receipts have to be considered as Fees for Technical Services-FTS and invoked the provisions of Explanation-2 to section 9(1)(vii) of the Act as well as the contents of para 4 of the Article 13 of India-UK Tax Treaty. In the process, the AO/DRP has not studied the nature of the SPS receipts and has not compared the same with the VAS service receipts. Eventually, the impugned SPS receipts of Rs.102,62,21,488/- are taxed by the AO/DRP as the FTS and royalty. Of course, AO considered followed the directions of the DRP as per the statute and taxed the said receipts as FTS and royalty. While computing the tax, AO applied the rate of 15% as per the DTAA Treaty with UK rejecting the assessee‟s submission for adopting the concessional rate of tax of 10% as per the Indian Income Tax Act, 1961. Aggrieved with the said decision of the AO/DRP, the assessee filed the present appeal vide the ground 1 above. 13. In the background of these facts, Ld Counsel brought our attention to both the contracts ie Sightholders Contract 2005-2008 (VAS Agreement) and Sightholders Contract 2008-2011 (SPS Agreement) and argued that the AO erroneously applied the VAS agreement -2005-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not be considered as technical services/Royalty. Further, referring to clause 14(4) of the SPS agreement, Ld Counsel mentioned that the said agreement supersedes all the prior contracts if any. Therefore, VAS agreement 2005-08 relied upon on by the AO / DRP is unsustainable in law. Further, Ld Counsel mentioned that the services rendered are not of FTS or royalty and therefore, they are outside the ambit of section 9(1)(vii) of the Act. 15. Additional Evidences: During the proceedings, Ld Counsel filed a paper book (Page no 330-360) and indexed the documents placed in it. Accordingly, the list of the papers are: (i) sample Supplier of Choice Agreement acknowledgement (ii) sample invoices for supply planning services (iii) sample Diamantaire Offer letter - acceptance (iv) invoices for grading services (v) invoices for inscription services (vi) invoices for DTC ABP fee and mentioned that these papers merely strengthen the existing papers filed before the AO and the DRP. As per the assessee, these papers do not constitute additional evidences in its strict sense. However, he admitted to the fact that these papers were not available before the AO and the DRP although they exist at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erring to page 73 of the paper book, Ld DR mentioned that the other services are also available to the sightholders indirectly by way of Extranet and avails assessee in a way "made available". Further, assessee took the support from the clauses relating to the KAM. Explaining the above observations, Ld DR mentioned that since both the VAS and SPS Agreement are one and the same in spirit and therefore, there is no need to enter into the said SPS agreement - 2008- 2011. Ld DR describes the same as the one aimed at tax avoidance with an ulterior motive of not paying taxes on the receipts earned by the assessee from the Sightholders. 17. Referring to the additional evidences, pages 330-360, Ld DR mentioned that the said documents, since dated 9.4.2008, were available to the assessee at the relevant point of time, when the assessments are made or the DRP directions were finalized and they were not filed by the assessee willfully. As these documents were not filed before the AO / DRP, they should not be entertained by the Tribunal at this stage. She filed a copy of the judgments of the High Court of Bombay in the case of Kamal C Mahboobbani (214 ITR 15) Veljiu Deoraj Co (68ITR 708) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal dated 18.11.2011 (supra) for the AY 2007-2008 was also relied heavily by the AO ignoring the fact the Tribunal is decided the grounds based on an expired Sightholders‟ contract 2005-2008 ignoring the truth that same is inapplicable to the AY 2008-2011 under consideration. If this line of argument is appreciated, there is a need for examining if the SPS constitutes VAS and if these services constitute technical services‟. Neither the AO nor the DRP has gone into these core aspects of the issue unfortunately. Therefore, it is the prayer of the Ld Counsel that the order of the Tribunal for the AY 2007-2008 is not applicable to the facts of the present case and hence, considering the additional information made available now, there is a need for re-visiting the files of the AO for de novo assessment on this issue. 19. Per contra, the case of the Revenue is that the SPS services offered by the assessee vide sightholders contract 2008-2011 are in a way akin to the VAS services offered under the expired sightholders contract 2005-2008. In this regard, Ld DR traced certain comparables clauses, the details of which are already discussed in the preceding paragraphs of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y constitute technical services for qualifying the provisions of Article 13 of the India UK Tax Treaty. As such Sri Lohia has not deliberated adequately on the technical nature of the impugned SPS services and they shall be dealt with before the AO during the remand proceedings. 21. Regarding the additional evidences furnished by the assessee, we find that the same are letters of acknowledgements of the Supply of Choices of the contract by the sightholders and copies of the invoices in support of the rendering of grading and other services and in our opinion, they shall only add value to the existing documents filed before the lower authorities. Considering the request for setting aside, it is the interest of the justice that these documents should also be considered by the authorities below while adjudicating the issue afresh. Therefore, we admit the same as per the discretionary powers provided by Rule 29 of ITAT Rules, 1963. These papers will make a contract complete and has effect of curing all the lacunas with regard to the completeness of the contract of the assessee with the sightholders. Considering the above, we are of the opinion that the conclusions of the AO and the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. It is the claim of the assessee that the inscription services rendered are distinctly different from grading services and such inscription fees received from the inscription services are separately accounted and offered as taxable income. Otherwise, the fees for grading services do not amount to royalty under Article 13 of the India-UK Tax Treaty. 24. During the proceedings before the DRP, assessee made elaborate submissions against the observation of the AO and argued stating that the grading services provided by the assessee does not amount to transfer of any commercial experience for attracting the provisions relating to royalty under the treaty. Finally, the DRP dismissed the submissions of the assessee providing the below mentioned discussion vide para 6.3 of the DRP order which read as under: "6.3. We have considered the AO‟s order and the assessee‟s submissions. Considering the nature of the services rendered, we agree with the AO that these services were rendered under Forevermar Diamantaire Agreement‟. We see that the diamonds processing under this agreement involves grading of the diamond based on which the identification processing under this ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of payer unlike the assessee who received the fees for grading services. Further, Ld Counsel mentioned that if the Tribunal is of the opinion that the matter requires re-examination in view of the additional evidences and the above cited Bombay High Court judgment for analyzing the facts, the matter can be referred to the files of the AO for fresh adjudication. 26. On the other hand, Ld DR heavily relied on the order of the AO / DRP directions extracted above. Referring to the above cited judgment of the Bombay High Court, Ld DR stated that the said decision is distinguishable on facts. Regarding the additional evidences, Ld DR mentioned that they were submitted before the Tribunal for the first time which should not be allowed at the stage. In this regard, Ld DR relied on the order of the Bombay High Court in the case of CIT vs. Smt. Kamal C. Mahboombbani [1995] 214 ITR 15 (Bom.). 27. We have heard both the parties and perused the relevant agreement with Diamantaires on the issue of grading services if they include the inscriptions services and involve transfer of the known how, skills etc to constitute royalty. The case of the assessee is that the fees of Rs. 4,00,703/- is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and the Accredited Business who ceased to be the sightholders of DTC as on 30.3.2008. As per the agreement of DTC-ABP, the assessee offers to its accredited business partners (i) to contact the DTC to discuss commercial and industry matters of public nature and for this members gets an opportunity to attend business meetings once a year; to call themselves as accredited DTC business, supply support material for business promotion and provide help to the Forevermark Diamantaire and contents of para 2 of the proposed agreement dated 11.6.2008 is relevant. It provides for sharing of the commercial knowledge and experience of the assessee with them. However, as per the assessee, there is no transfer of its expert knowledge and skills to the Accredited Business Partners. Assessee argues that the fees received is of routine nature and therefore, receipts received by the assessee should not be labeled as FTS/royalty. As per the assessee, it does not make available of any knowledge, know-how, experience, skill etc. The Revenue did not accept the above explanation of the assessee and held that the services rendered under the DTC-ABP agreement constitute an extension of VAS. As per the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usions on ground 1 and ground 5, we are of the opinion that this issue should also be remanded to the files of the AO for fresh adjudication. Accordingly, relevant conclusions of the AO /DRP relating to ground no.5 are set aside and the said ground is remanded to the files of the AO for fresh adjudication after granting reasonable opportunity of being heard to the assessee. 32. Grounds 8 and 9 relates to the mandatory interest u/s 234A and 234B of the Act. It is admitted fact that the said sections are put into service by the AO in view of the additions made in the assessment. In effect, these are consequential in nature and the levy changes with the variation in total income assessed by the AO. Nevertheless, with regard to the levy of interest u/s 234HB of the Act, it is the argument of the assessee that the assessee‟s case is fully covered by the TDS provisions and therefore, even with change of assessed income, no interest u/s 234B should be charged. In this regard, Ld Counsel relied on the jurisdictional high Court‟s judgment in the case of NGC Network Asia LLC 222CTR 86 apart of many others. In this regard, he also brought our attention to the contents of para 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old that while computing advance tax payable for the purpose of computation of interest under section 234B tax deductible at source in relation to royalty and FTS will have to be reduced. The AO is directed to act accordingly." 36. Therefore, in our opinion, the above decision of the Tribunal is squarely applicable to the ground 9 of the appeal. Assessee being a non resident, the duty is cast on the payer to pay the tax at source and on failure, no interest u/s 234B of the Act is imposed on the payee-assessee. Accordingly, we direct the AO to reduce the relatable interest u/s 234B of the Act. Accordingly, ground 9 is allowed in favour of the assessee. 37. Ground 10 relates the initiation of penalty proceedings u/s 271(1)(c) of the Act and DRP dismissed the same as not maintainable and held that the same does not relates to the variation in income. After hearing both parties, we also dismiss the same as the same is merely against the initiation of the penalty proceedings and no penalty is actually levied. Accordingly, the ground 10 is dismissed. 38. In the result, appeal of the assessee is partly allowed for statistical purposes. Order is pronounced in the open court on 4th ..... 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