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TMI Blog2016 (6) TMI 547X X X X Extracts X X X X X X X X Extracts X X X X ..... ia; and 3. The ld. Assessing Officer has erred, in law and in facts, in characterizing the fee from management and administrative support services earned by the appellant as Royalty as defined in Article 13 of the Convention for avoidance of double taxation and prevention of fiscal evasion between India and United Kingdom of Great Britain and Northern Ireland. The appellant submits that each of the above grounds is independent and without prejudice to one another. The appellant craves leave to add, alter, amend, vary omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 3. The only issue that arises for consideration in this appeal of the assessee is, whether the payment received by the assessee from TNT India Pvt. Ltd. under Management and Administrative Services (in short "MAS"] agreement is in the nature of royalty as per provisions of section 9(1)(vi) as well as Article 13 of the Indo-UK DTAA? 4. Brief facts leading to the controversy are that the assessee is a foreign company incorporated in UK and tax resident o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee invoiced TNT India for an amount of Rs. 9,99,12,153/- for providing the services under the agreement on which TNT India has deducted tax at source amounting to Rs. 1,95,46,550 u/s. 195 of the Act, before making remittance of the said amount. The assessee filed its return of income on 28.3.2008 declaring NIL taxable income and claimed refund/credit for the tax deducted at source. The assessee claimed that it does not have any presence in India so as to constitute a Permanent Establishment (PE) and therefore income earned from the provision of MAS would not be taxable in India u/s. 9(1) of the Act as well as under Article 13 of the Indo-UK DTAA. 6. The Assessing Officer while passing the draft assessment order held that provision of services rendered by the assessee under the MAS agreement has provision for know-how and such services would fall within the purview of royalty. 7. The assessee challenged the action of AO before the DRP and contended that the consideration received by assessee does not fall under the purview of royalty, as it was received against the provision of commercial services and not imparting of any know-how or secret formula or other information. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd financial advisors is purely for services and not covered under the term 'payment for technical services' as per the DTA or royalty for rendering such services, when one is not imparting information concerning technical, industrial, commercial or scientific knowledge, experience or skill. The ld. AR then relied on the decision of the Mumbai Bench of the Tribunal in the case of GECF Asia Ltd. v. DDIT, 34 ITR (Trib) 303 (Mum). Thus, it has been asserted that information and advise provided by the assessee to TNT India in the course of rendering management and administrative support services does not amount to imparting know-how, experience or information concerning technical, industrial, commercial or scientific knowledge and consequently would not fall within the purview of royalty as defined under the Act as well as under Indo-UK DTAA. 10. The ld. AR has referred to the OECD Model Tax Convention and submitted that the Mumbai Bench of the Tribunal in the case of GECF Asia Ltd. (supra) after considering the OECD commentary on the Model Tax Convention has decided an identical issue. 11. On the other hand, the ld. DR has submitted that even general services may be a know-how for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied information to TNT India which has to be used by TNT India for its own account. The AO further noted that commercial information being provided by the assessee to TNT India arises from previous experience which definitely has practical application in the operations of the enterprise and from which an economic benefit can be derived. Thus, the AO held that the services which are being provided by the assessee are in fact in the nature of supply of commercial information concerning commercial experience. In the concluding para, the AO has also observed as under:- "Looking into the contract it is possible to suggest that some information being provided like sales support, liaison with professional advisors lobbying activities and co-ordination with trade associations may not strictly speaking be in the nature of supply of 'know-how'. But details regarding them were not provided. The assessee was asked to give a break up of payments received from each of the various services / information rendered by it. The A.R. of the assessee Mr. C. Narayan submitted that no break up is available and that it is a composite contract. Information was also not provided about the cost incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a provisional basis according to budgeted projected estimated or actual information provided always that periodically an adjustment to actual costs is made within the next following financial year. 3.3 The providing party shall directly or through TNT Finance BV, a private limited li8ability company with its headquarters at Amsterdam raise invoices in monthly arrears and the invoices shall generally be rendered in Euro but values referred to in any invoice may also be expressed in an appropriate or agreed currency subject to the Treasury Agreements. 3.4 Settlement of invoices will be made on or before 30 days after the end of the month in which the invoice was issued or in accordance with such other Treasury Arrangements as may be agreed from time to time. Unsettled balances will attract interest according to the Treasury Agreements. 3.5 The amounts set out in Schedule 4 are exclusive of VAT and it is the responsibility of both the relevant Providing Party and the Receiving Party to ensure that the correct VAT treatment is applied to any charge in respect of any Service provided. 6. Confidentiality 6.1 Each Party shall take all reasonable steps to keep secret and mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services itself, it cannot be ascertained whether the provision of these services are in the nature of imparting knowledge, experience, information concerning industrial, commercial or scientific experience or skill. The term 'royalty' has been defined in Explanation 2 to 6 of section 9(1)(vi) as well as under Article 13 of the Indo-UK DTAA. For ready reference, we quote Explanation 2 to 6 to section 9(1)(vi) of the Act as well as Article 13(3) of Indo-UK tax treaty as under:- "9. Income deemed to accrue or arise in India. (1) The following incomes shall be deemed to accrue or arise in India- (vi) income by way of royalty payable by- Explanation 1 : ...... 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 gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade-mark or similar property; (ii) the imparting of any information concerning the working of or the use of, a patent, invention, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICES 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, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) Payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic." 17. As it is clear from a plain reading of the definition of the term 'royalty' as provided under the Act as well as under the DTAA, except for some further clarification and meaning of certain terms of the said definition, broadly there is no other difference in the meaning of 'royalty' provided under the Act as well as in the treaty. The meaning of the term 'royalty' as pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for Indian entity which was not already in existence, then providing such report, plan or design by using the expertise would not constitute imparting of such expertise, information or experience and therefore would not fall under the purview of royalty, as held by the Hon'ble Bombay High Court in the case of Diamond Services International (P) Ltd. v. UOI (supra) as under:- " 9. The question that remains to be answered is whether there is imparting of specific experience by GIA to the person. Impart in Webster's Encyclopaedic Unabridged Dictionary has been defined "to give, to bestow; communicate; to grant a part or share of". In Oxford English Reference Dictionary it is prescribed as "give a share of (a thing)". A plain reading, therefore, of the meaning of the word "impart" implies that it means to give, to bestow, communicate, to grant a part or share of or give a share of a thing. Considering that the term royalty envisages grant or share of industrial or commercial experience. In other words there should be a transfer of "industrial or commercial experience" from assignor to the assignee for a consideration. Therefore, to fall within the meaning of the term royalty under ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does it impart its experience to its client ? In our opinion there is no imparting of its experience in favour of the client. What the client receives is the report where the GIA uses its commercial or technical knowledge to give a report to the client. Illustrative example would be a lawyer giving advise to his client, a doctor giving his medical opinion, a laboratory submitting blood analysis report and the like. These cannot be said to be imparting of information by the person who possesses such information. What such person does is uses his experience and technical know-how for a consideration without parting with that information. In our opinion, therefore, considering the definition of royalty under art. 12 of DTAA there is no parting or rendering of technical services either of managerial, technical or consultancy nature or industrial, commercial or scientific experience. Once the consideration/fees received do not fall within the expression "royalty" the action of the respondents in refusing the certificate under s. 195 of the IT Act was clearly without jurisdiction and consequently the impugned orders are set aside with a further direction to the respondent No. 2 to issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erience, paragraph 2 is referring to the concept of "know-how". Various specialist bodies and authors have formulated definitions of know-how. The words "payments... for information concerning industrial, commercial or scientific experience" are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to undivulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived . since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer. 11.1 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. It is recognized that the grantor is not required to play any part himself in the application of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifically for the payer out of generally available information (a payment for the confidential list of customers to which the payee has provided a particular product or service would, however, constitute a payment for know-how as it would relate to the commercial experience of the payee in dealing with these customers), -- payments for an opinion given by an engineer, an advocate or an accountant, and -- payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently. 11.5 In the particular case of a contract involving the provision, by the supplier, of information concerning computer programming, as a general rule the payment will only be considered to be made in consideration for the provision of such information so as to constitute know-how where it is made to acquire information constituting ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial, commercial or scientific" experience in the following manner:- "11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 alludes to the concept of "know-how". Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the ''Association des Bureaux pour la Protection de la Propriete Industrielle" (ANBPPI), states that "knowhow is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, knowhow represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique". 11.1 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. It is recognised that the grantor is not required to play any part himself in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c34; or an accountant, and -----payments for advice provided electronically, for electronic¾ communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response t frequently asked questions or common problems that arise frequently. "emphasis supplied". 10. From the above, it can be gathered that the royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to the concept of knowhow. There is an element of imparting of knowhow to the other, so that the other person can use or has right to use such knowhow. In case of industrial, commercial and scientific experience, if services are being rendered simply as an advisory or consultancy, then it cannot be termed as "royalty", because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience. The eminent author Klaus Vogel in his book "Klaus Vogel On Double Tax Convent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine of the principles discussed above. If such services do not involve imparting of knowhow or transfer of any knowledge, experience or skill, then it cannot be held to be taxable as royalty. Since the issue of FTS is not the subject matter of dispute after the direction of the DRP, hence, we are not expressing any opinion on FTS. Thus, ground no.1 and 2, are treated as partly allowed for statistical purposes." 21. In the case of the assessee, it appears to be a composite agreement for providing various services, some of which are purely business/commercial practice and contract services and others are in the nature of imparting the knowledge, experience and experience, which concern the commercial or business experience. In such a scenario, when the assessee is unable to provide bifurcation of the payment relating to each kind of services, then as per para 11.6 of the OECD Model Tax Convention, where a reasonable apportionment is not possible, then the other part of the services could also be given the tax treatment as given to one part of the services provided, which constitute the principal purpose of the contract and falling under the purview of royalty. In view of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X
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