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GVK Oil and Gas Limited Versus The ADIT (Intl. Taxation) -I, Hyderabad

2016 (4) TMI 589 - ITAT HYDERABAD

TDS u/s 195 - Royalty receipt - nature of the payment made by the assessee to M/s. GX Technology Corporation, USA and M/s. GGS Spectrum Limited, UK - tds liability - Indo-US DTAA - Held that:- All that is provided by the licensor is the Data relating to the geophysical and geological information about the east and west coast of India and is not responsible for the accuracy or usefulness of such Data. Thus, it is clear that licensors have only made available the data acquired by them and availabl .....

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12 - Dated:- 9-3-2016 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Assessee : Mr. Deepak Chopra and Ms. Manasvini Bajpai For The Assessee : Mr. Moharana ORDER PER SMT. P. MADHAVI DEVI, J.M. Both are assessee s appeals for the A.Y. 2009- 10 against the order of the Ld. CIT(A)-V, Hyderabad confirming the order of the A.O. under section 201(1) and 201(1A) of the I.T. Act, 1961. The assessee has raised the following grounds of appeal in ITA No. 317/h/2 .....

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;GGS'), for purchase of dataset is in the nature of royalty, hence taxable under the Act and India UK Double tax avoidance agreement. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding the assessee as an "assessee in default' for not withholding of taxes on payments made to GGS, and to that extent the order of the Ld. CIT(A) is unjustified, erroneous and unsustainable. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the .....

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('Ld. CIT(A)') dated 2 December, 2011 under section 250 of the Income-tax Act, 1961 ( Act') on the following grounds : 1. The Ld. CIT(A) erred in fact and in law in holding that the payment to GX Technology Corporation, USA ( GXT ), for purchase of dataset is in the nature of royalty, hence taxable under the Act and India US Double tax avoidance agreement. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding the assessee as an "assessee in defau .....

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ansaction is the same and hence both the appeals were heard together and are being disposed of by this common and consolidated order. 2. Brief facts of the case leading to the orders holding the assessee to be an assessee in default are as follows: The assessee is a company engaged in the business of Oil and Gas exploration. On perusal of the C.A. Certificate and undertaking furnished by the deductor-assessee, the ADIT (Intl. Taxation)-1, Hyderabad noticed that the assessee has made payment of U .....

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r Section u/s195 of the IT Act and it was mentioned that the payment was made towards purchase of dataset. The A.O. therefore, examined the nature of the transactions to determine the nature of the payment and whether the TDS provisions were applicable or not. 2.1. The A.O. observed that the assessee has bid for the oil and gas exploration block offered under the NELP-VII by the Ministry of Petroleum and Natural Gas, Government of India and during the course of bidding for various blocks, the co .....

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ata and Derivatives and M/s. GGS, a UK based company and a leading provider of a comprehensive range of advanced seismic Data and Derivatives. By virtue of these agreements, both the companies agreed to grant non-exclusive license/right to use certain Data and Derivatives in consideration for an agreed license fee. The A.O. observed that the assessee has made the payment to GXT, as a consideration/compensation for the non-exclusive license to use certain Data and Derivatives, which the GXT named .....

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ntal region. From a brief description about the IndiaSPAN from a publication on www.iongeo.com/gxt i.e., (the official website of Ion/GXT). A.O. observed that it is an ultra-deep, regional 2D seismic data program and geologic study covering all the major prospective basins offshore east and west India and that this new data is providing both the fundamental basis for evaluation of India s vast off-shore margin, as well as the regional framework in depth domain. He further observed that this has .....

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tors. He observed that IndiaSPAN not only provides the Data but also contains various imageries developed through advanced imaging techniques and software, and other interpretations/ analysis/derivatives and provides comprehensive knowledge on the hydrocarbon geology of east and west coast of India, which the Oil and Gas Companies can use to identify the potential hydrocarbon reserves in the region. Thus, he observed that the data on the IndiaSPAN is acquired by GXT using its expertise, technolo .....

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ustrial, commercial and scientific experience. He further observed that this data is proprietary to and a trade secret of GX Technology Corporation, USA and is undivulged to the public. He found that the above information/knowledge is available to the user only on securing a valid license from the licensor i.e., GXT and therefore, the payment made by the assessee to GXT by way of license-fee" amounts to consideration for information concerning industrial, commercial or scientific experience .....

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th under the India-US DTAA as well as the Indian Income Tax At. Further, he observed that the GXT owns knowledge i.e., right on IndiaSPAN or the data and derivatives for which the assessee has paid the license-fee and held that the same constitutes Royalty . Since the assessee has failed to make TDS under section 195 of the Act before making the payment, the AO held the assessee to be an assessee-in-default under section 201(1) and made the disallowance under section 201(1) and also levied inter .....

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f right to use certain data and derivatives in consideration for an agreed license fee. The Assessing Officer observed that in the assessee s own case wherein data and derivatives was licensed by GXT, to the assessee, the payment was held to be in the nature of Royalty and the TDS provisions were made applicable. Following the same, the A.O. treated the assessee as an assessee-in-default and also levied interest under section 201(1A) of the I.T. Act. Aggrieved, assessee preferred an appeal to CI .....

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ed that the GXT takes no responsibility on the outcome of the usage of the data by the assessee and therefore, it is clear that it provides only the data and does not provide any experience, knowledge or skill to the assessee. He has drawn our attention to various clauses of the agreement to demonstrate that the previous experience of the companies both GXT or GGS has not been passed on to the assessee but what was provided is only the data. He further submitted that IndiaSPAN is owned by the Go .....

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a transfer of the right itself but it is a copyrighted article like computer software off the SHELF and therefore, it cannot be considered as use of a copyright and the payment as Royalty . He further drew our attention to the clauses in the agreement wherein it is provided that the assessee is provided with a non-exclusive right to use dataset and thus proves that the software is not customized to the requirement of the assessee and further is not for exclusive use of the assessee, which means .....

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s also drawn our attention to para 4.3.1 at page No.6 of the order of the Ld. CIT(A) to demonstrate that the recitals of the Article-2 of the Indo-US DTAA is wrongly quoted by him and has wrongly been relied upon to come to the conclusion that the consideration paid by the assessee for obtaining the license is Royalty. He submitted that the Ld. CIT(A) has erroneous relied upon the decision relating to the nature of software to hold the payment to be the Royalty. He further relied upon the follow .....

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r hand, supported the orders of the authorities below and submitted that as is evident from page 74 of the paper book, the dataset obtained by the assessee under a license is highly customized. He submitted that the decisions on which the assessee has relied upon i.e., in the case of WIPRO and HEG (cited supra), the facts are distinguishable from assessee s case as they were the cases of the software purchase off the SHELF, whereas in the case of the assessee, the client ordered the dataset and .....

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and the right to use is given to a customer, then the payment cannot but be considered as the consideration for the use of the intangible property and hence, it has to be treated as Royalty . The Ld. D.R. further submitted that where the customized data has been made available upon the request of the assessee, it becomes knowhow as it cannot be used by any other party. He further relied upon the decision of ITAT at Bangalore in the case of ING Vysya Bank in support of his contention that the pay .....

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n to the distinction between the definition of Royalty under section 9(1)(vi) of the Income Tax Act and the Explanation (2) thereunder, and also under the Indo- US DTAA, and stated that under section-9, the term Royalty includes knowledge, experience or skill while under DTAA only the word experience is used and further that where the provisions of the DTAA are beneficial to an assessee, the same shall be applied. 8. Having regard to the rival contentions and the material on record, we find that .....

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e the product IndiaSPAN for a period of 40 years from M/s. GX Technology Corporation, USA. IndiaSPAN is a Regional 2d seismic data programme and geological and geophysical study covering all the major prospective basins off-shore east and west India and is providing both the fundamental basis for evaluation of India s vast offshore margins as well as the regional framework in depth domain. Thus, it is seen that the said product is highly technical and complicated and the data therein can be acce .....

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e and use such data for furtherance of its objects. Similar is the transaction with M/s. GGS Spectrum Limited, UK. The definition of Royalty under the Income Tax Act is provided under Explanation (2) to section 9(1)(vi) of the Act which reads as under : Explanation 2.- For the purposes of this clause," royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head" Capital gain .....

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he 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 license) 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 co .....

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The term Royalties as used in this Article means: (a) Payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, inclu .....

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AA between India and UK is also similar to the definition of Royalty under DTAA between India and USA. For ready reference, the definition of Royalty under DTAA between India and UK is extracted hereunder. Article 13 Royalties and fees for technical services 1. …. …. …. …. 2. …. …. …. …. 3. For the purpose of this Article, the term royalties means : (a) Payments of any kind received as a consideration for the use of, or the right to use, an .....

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er than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 8.3. From the above definitions, we find that the definition of Royalty under the Income Tax Act is more exhaustive as compared to the definition under the DTAA between India and USA and India and UK. Under the Income Tax Act, consideration for granting of a license for the use of the property mentioned therein also means Royalty, whereas, there is no such provision un .....

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has made payment for the right to use information embedded in the product. Further, though the said information is scientific as well as technical, the assessee is permitted to use the said information only as a licensee. 8.4. Let us, now see the ratio laid down by the Courts in the cases relied upon by the assessee. 8.4.1. In the case of Wipro Limited vs. ITO (2005) 94 ITD ( (Bang), the ITAT was dealing with the definition of Royalty under the Income Tax Act and the DTAA between India and USA .....

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ific work, the payment is not covered by 'royalty' under art. 12(3)(a) of DTAA between India and USA-Data server is indisputably located outside India-Consequently, the provision of services of offering the database is an event outside the taxable territories of India-GG has no permanent establishment in India-Consequently, said payments to GG are not amenable to taxation in India. 8.4.2. In the case of Dy. Director of Income Tax vs. PREROY A.G. (2010) 39 SOT 187 (Mum.) the Tribunal was .....

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ic consultant, does not amount to know-how being imparted to the buyer of the strategic consulting services. 8.4.3. In the case of Real Resourcing Ltd., In RE the Authority for Advance Rulings reported in (2010) 322 ITR 58 was dealing with the definition of FTS under the India-UK DTAA and has held as under : Though the CIT, in his comments has attempted to bring the income in question within the scope of clauses (a) and (c) of art. 13.4, they have no application. The contention that the applican .....

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ver, by giving access to the database, it cannot be said that the information concerning industrial, commercial or scientific experience will be transmitted by the applicant to the recruiting agencies. If the contention of Revenue is accepted, it would amount to unwarranted expansion of the terms fees for technical services and royalties. Consideration for providing information concerning industrial, commercial or scientific experience basically involves the sharing of technical know-how and exp .....

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sfied in the instant case. 8.4.4. In the case of Diamond Services International (P) Ltd., vs. Union of India & Others (2008) 304 ITR 201, the Hon ble Bombay High Court while dealing with the definition of Royalty under the DTAA between India and Singalore which is similarly worded as in the DTAA between India and UK has held as under : The grading report by GIA is a statement of fact as to the characteristics of the diamond. The report gives the attributes of the diamond and includes an anal .....

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mmercial interest to the party paying or getting the right to use the experience of GIA. There is also no transfer of any skill or knowledge of GIA to the customers in the issuance of grading reports. The payment received is not the one for the use or the right to use experience, but is instead one for the application of experience to a certain factual situation i.e. GIA shall apply its expertise to the diamonds submitted by the clients and determine its true feature. The nature of the transacti .....

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r grading. The definition of royalty under the DTAA under art. 12(3) as defined therein, uses the expression "or for information concerning industrial, commercial or scientific experience". There is no parting of information concerning industrial, commercial or scientific experience by GIA when it issues the grading certificate. Under sub-ct. (4) the payments received must be in consideration for services of managerial, technical or consultancy nature. That could include to the applica .....

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then invoked c1. (iv) of Expln. 2 to s. 9(1) which speaks of "imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill". The DTAA (art. 12.3) uses slightly different language. It speaks of payment received for "information concerning industrial, commercial or scientific experience". The payment in question cannot be brought within the fold of this part of definition of 'royalty'. The clause does not contempla .....

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oes not impart any information relating to them. The information or data transmitted through the database is the published information already available in public domain and it is not something which is exclusively available to the applicant. The applicant compiles and presents the information in proper form by applying its own methodology. It does not amount to imparting of information concerning the applicant's own knowledge, experience or skills in commercial and financial matters. The co .....

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property itself, the consideration paid cannot be treated as Royalty . In the case before us, the license is granted to use certain data from time to time upon the terms and conditions set in the license agreement. It is seen that both the licenses are non-exclusive licenses and therefore, the information/ DATA is not customized to meet the assessee s requirements exclusively. To understand the exact nature of the transaction, the relevant clauses of agreements, are reproduced below : Agreement .....

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h Supplement. 1.5. "Derivative(s)" means all processed and reprocessed Data regardless of the form or medium on which it is displayed or stored whether produced by Licensee or Third Parties. 1.8. "Licensee's Consultant(s)" means Third Party(- ies) which are Consultants in the geophysical industry freely selected and entrusted by Licensee to interpret, reprocess, make other technical studies or provide storage of the Data for the sole use and benefit of Licensee but subjec .....

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dentiality : Licensor is the owner, or the duly authorized agent if of its principal (the "Data Owner") of any and all intellectual and/or industrial property rights. Licensor represents, and Licensee acknowledges, that the Data and Derivatives, constitute valuable and highly confidential trade secrets that are not generally and publicly available and are the sole property and proprietary information of Licensor, or the data Owner if other than Licensor. Title to and Ownership rights i .....

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such prices and on such terms and conditions as are determined by Licensor. Except as expressly permitted by this License, Licensee agrees (a) to keep strictly confidential, and shall ensure that its employees and agents keep strictly confidential, the Data and Derivatives and (b) not to Show, allow the use of, or display the Data or Derivatives to any Third Party. 2.2. Original Data-Retention/Licensing/Right to Destroy : It is the intent of Licensor to retain the original Data (such as field ta .....

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f its intention to do so. 2.3. Notice of Restricted Use : Licensee may make copies of any Data and derivatives for the sole purpose of using such copies pursuant to the rights granted in this License; provided that all such copies shall have the following notice printed thereon or attached to it or its medium: NOTICE "This Data is proprietary to and a trade secret of GX Technology Corporation and/or its Related Entities ("Licensor"). The use of this Data and Derivatives is restric .....

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terms and conditions of Licensee under this License. Licensee shall not Show, Transfer or otherwise dispose of or allow access to, or use of any or all, of the Data or Derivatives except as specifically provided for in this Article 3 and the Article 5 below. Copies of any Confidentiality Agreements between Licensee and Third Parties as required by the terms and conditions of this License shall be provided to Licensor upon formal written request. 3.3. Licensee's Consultant The Data and Deriv .....

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see, the Consultant shall not retain any copies of the Data, Derivatives, or analyses or interpretations of the Data or Derivatives and shall deliver all copies thereof to Licensee. 6. WARRANTIES AND DISCLAIMERS : 6.1. Licensor represents and warrants on its behalf and on behalf of the Data Owner that it has full authority and power to grant to Licensee the use rights covered by in this License. Licensor assumes all liabilities which may arise out of its activities in acquiring and processing an .....

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eedings. 6.2. Data delivered to Licensee under this License and any Supplement are, to the best V of the knowledge, information and belief of Licensor, prepared in accordance with accepted practices of the geophysical profession; HOWEVER, LICENSEE ACKNOWLEDGES IT IS ACCEPTING ALL DATA SUBJECT HERETO "AS IS" AND, EXCEPT AS PROVIDED FOR UNDER ARTICLE 6.1, LICENSOR MAKES NO REPRESENTION OR WARRANTY, EXPRESS OR IMPLIED, IN RESPECT TO THE QUALITY, ACCURACY OR USEFULNESS OF SUCH DATA OR OTHE .....

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L HAVE ANY CLAIM AGAINST AND HEREBY RELEASES LICENSOR FROM ANY LIABILITY AS A CONSEQUENCE THEREOF. 6.3. Licensor makes no representation that oil and gas or other mineral leases will be granted or other exploration and/or development for production activity will be authorized for geographical areas covered by the Data by any individual, , company or other legal entity, government agency or other third party and any implied warranty or representation to that effect is hereby expressly negated. 9. .....

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