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2016 (6) TMI 547 - ITAT BANGALORE

2016 (6) TMI 547 - ITAT BANGALORE - TMI - Nature of royalty - 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? - Held that:- 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 servic .....

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tute the principal purpose of the contract and falling under the purview of royalty. In view of the above facts and circumstances of the case, where the assessee has failed to produce the relevant information, details and record to support its case and which is also necessary to segregate such part of the payment which may not be falling under the purview of royalty, we do not find any error or illegality in the impugned orders of authorities below in treating the entire consideration received b .....

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ce of the directions of DRP dated 20.9.2010 for the assessment year 2007-08. 2. The assessee has raised the following grounds:- 1. The ld. Assessing Officer has erred, in law and in facts, in assessing the total income of the appellant at ₹ 99,912,153 as against Rs.NIL, based on the return of income filed by the appellant. 2. The ld. Assessing Officer has erred, in law and in facts, in not holding that the fee from management and administrative support services of the appellant is not subj .....

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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 royal .....

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escription of services provided by the assessee under the agreement has been given in Schedule-2 of the agreement as under:- Schedule 2 The Services 1. Advice on questions of business policy of a Party. 2. Management Information and other automated system services. 3. Assistance in evaluation of the development in the international market. 4. New process information, including specifications and application notes. 5. Assistance with evaluating new business opportunities. 6. Provision of opening .....

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of a party. 11. Assistance in legal and tax matters / risk management /treasury but excluding any services covered by Agreements between Group companies relating to financial or treasury arrangements. 12. Provision of assistance in human resource, education and training of staff. 13. Ancillary support and assistance. 14. Other services as may be requested and agreed from time to time. 15. Advising the management of the party on financial matters. 16. Drawing up finance plans and assistance in p .....

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co-ordination with trade associations. 5. The assessee invoiced TNT India for an amount of ₹ 9,99,12,153/- for providing the services under the agreement on which TNT India has deducted tax at source amounting to ₹ 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 .....

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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 DRP did not accept the contention of assessee and confirmed the view of the AO in treating the said receipt/income as royalty. 8. Before us, the ld. AR of the assessee has submitted that the assessee has received an amount of ₹ 9.99 crores fr .....

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, commercial or scientific knowledge, experience or skill. The information/advise rendered by the assessee is not in the nature of technical, industrial or scientific knowledge, so as to fall within the purview of commercial knowledge and therefore it would not constitute as royalty . The information/advise provided by the assessee to TNT India in the course of Managerial and Administrative Support services is only for the purpose of improving the management and administrative efficiency of TNT .....

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ommercial venture, would not be a royalty. 9. The ld. AR has also relied on the judgment of Hon ble Bombay High Court in the case of Diamond Services International (P) Ltd. v. UOI & Ors., 308 ITR 201 (Bom) and submitted that when there is no imparting of experience in favour of the client, but the clients receive report prepared by the use of its commercial/technical knowledge, it cannot be said to be imparting of information by the person, who possess such information. He has also relied on .....

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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 .....

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ot furnish break-up of his various services provided to TNT India and expressed its inability to provide such break-up as it was not available. He has further contended that the details of billing are also not provided before the AO, despite the AO asking to furnish the details. The ld. DR has referred to the findings of the AO and the DRP and submitted that the AO has given a finding that even as per the OECD Model Tax Convention and Guidelines, the payment in question falls under the purview o .....

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ted that it specifies the criteria as provided under the definition of royalty , when the services provided by the assessee are in the nature of undivulged information of industrial, commercial or scientific nature arising from the previous experience, which is practical application in the operations of TNT India and from the disclosure of which an economic benefit can be derived by the recipient of such information. Thus, the ld. DR has submitted that when the knowledge or information provided .....

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owhow was imparted by the assessee to TNT India and the work provided was only a service of commercial nature. 13. We have considered the rival submissions as well as relevant material on record. The AO has given his finding by holding that assessee 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 appli .....

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dination 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 by the assessee in rendering these services. 14. Thu .....

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T India. We further note that Schedule-4 of the MAS agreement is also not filed along with copy of agreement in the Paperbook-I. Therefore, we have no privilege to examine the details of the payments against the various services/information and further as per clause 3.5 of the agreement, the amounts as set out in Schedule-4 are also not made available, as the assessee has not annexed Schedule-4 along with the agreement. Since the assessee chose not to furnish the relevant information, despite th .....

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n Relation to the provision of services. Providing Party Means a Designated Head Office Company providing one or more of the services. 3. Compensation. 3.1 In consideration for the provision of the services each Receiving Party shall compensate the relevant providing party with an amount as set out in Schedule 3 as amended form time to time by agreement of the Parties. 3.2 The relevant Providing Party or a nominee Group Company shall calculate periodically in accordance with Schedule 3 the payme .....

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ing 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 .....

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and maintain in confidence all confidential information disclosed to such party by any other party during the term of this Agreement and thereafter save that this obligation of secrecy and confidentiality shall not apply to information : 6.1.1 which at the time of disclosure to such party is in the public domain as evidenced by printed publication or otherwise; or 6.1.2 which after disclosure to such party falls into the public domain through no fault of a Party; or 6.1.3 which such Party has re .....

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d costs of providing the services together with a reasonable profit element where appropriate. 2. Indirect Charges. Where a direct charge is not made for the Services then an indirect charge shall be made. The indirect charge shall be based on gross revenues. Thus, as per the agreement, the receiving party shall compensate the relevant service providing party with an amount which may include direct charges as well as indirect charges. The direct chares as per Schedule-3 shall be made on the basi .....

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f providing such services is charged based on gross revenue. It is clear that the services fall under the second category are definitely not specifically developed or designed for the purpose of providing services to TNT India, but the same may be already in existence. The list of services as provided under Schedule-2 contains as many as 23 kinds of services. By nomenclature of these services itself, it cannot be ascertained whether the provision of these services are in the nature of imparting .....

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ay 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 prop .....

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ipment 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 activi .....

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ed transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information .....

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NICAL 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, 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 .....

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ation 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 provided under Article 13(3) of Indo-UK treaty reveals that payment of any kind received is a consideration for use or the right to use any copyright, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific exp .....

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gn or model, plan, secret formula or process. Thus, the case of assessee has to be examined in the context of the last part of the definition to say a consideration for use or right to use for information, concerning industrial, commercial or scientific experience. To bring the case in the definition of royalty, imparting of experience, information by the assessee to TNT India is necessary. The AO has also observed in the assessment order that it is possible to suggest that some information bein .....

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d by the assessee for providing such services, whether the assessee charged the Indian entity on the basis of Cost Plus or on the basis of gross revenue. If the compensation is charged by the assessee based on the gross revenue, then it implies that assessee did not incur any cost in providing such services as these are the kind of information, knowledge or expertise as well as experience already in existence and in the possession of assessee. There is no quarrel that using the experience and ex .....

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stion 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 o .....

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tc. to retain the property in them and permit the use or allow the right to use such patents, designs or models, plans, secret formula, etc. to another person. Where there is no transfer of the right to use, payment made cannot be treated as royalty. To be considered as royalty normally the following factors should be present in the transaction : "(a) there should be a consideration for use or transfer of right to use; (b) the payment shall be towards grant or share for acquiring inter alia .....

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f Kerala AIR 1957 SC 657 : "(a) tax can be charged only if the activity sought to be taxed falls squarely within the taxing entry; (b) a tax cannot be imposed by presumption, inference or conjecture, but must be imposed only as per the specific language of the taxing entry. (c) each word used in a taxing provision must be given effect to." Learned counsel for both parties had submitted some orders of the Tribunal for the purpose of advancing their contention that the issuance of the gr .....

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13th June, 2007 or for that matter in the order dt. 13th Nov., 2006 it is set out that there is a transfer of commercial experience in the (shape) of diamond grading report. As discussed earlier it is true that GIA may have the experience of grading. However, 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 .....

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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 the certificate as applied fo .....

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nd other automatic system services, which may be the assessee s own expertise and experience and acquired during due course of time. Therefore, these services prima facie appear to be in existence and being provided in the form of information, which are definitely related to the commercial and business activity of the Indian entity. It is not the case of the assessee that all these services provided to the Indian entity is available in the public domain, rather, there is a confidential clause in .....

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he development of a design, model or plan that does not already exist. In such a case, the payment is made in consideration for the services that will result in the development of that design, model or plan and would thus fall under Article 7. This will be the case even if the designer of the design, model or plan (e.g. an architect) retains all rights, including the copyright, in that design, model or plan. Where, however, the owner of the copyright in previously developed plans merely grants s .....

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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 disc .....

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not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. 11.3 The need to distinguish these two types of payments, i.e. pay .....

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case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. - In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the ot .....

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mples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include : - payments obtained as consideration for after sales service, - payments for services rendered by a seller to the purchaser under a warranty, - payments for pure technical assistance, - payments for a list of potential customers, when such a list is developed specifically for the payer out of generally available information .....

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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 c .....

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where the franchisor imparts his knowledge and experience to the franchisee and, in addition, provides him with varied technical assistance, which, in certain cases, is backed up with financial assistance and the supply of goods. The appropriate course to take with a mixed contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated consideration according to the various parts of .....

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imparting the knowledge, however, if the payment is received for development of a design, model or plan that does not already exist, then the development of such design, model or plan by using its own experience or experience, skill, know-how, would not constitute as imparting the knowledge, experience or know-how, but the payment is simply for execution of work and therefore cannot be said to be royalty. On the contrary, if the payment is received to supply the existing information or reproduce .....

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ined the term industrial, 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 Pro .....

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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 application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his cal .....

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y exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge skill or expertise to the other party. In most cases involving the supply of know-how, th .....

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s for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services. 11.4 Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include: - payments obtained as consideration for after-sales service ¾ payments for services rendered by a seller to the purchaser¾ under a .....

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. 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 .....

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experience (knowhow) the condition for applying art.12 is that the remuneration is being paid for imparting such knowhow…. In contrast, the criterion used to distinguish the provisions of know-how from rendering advisory services is the concept of imparting. An advisor or consultant, rather than imparting this experience, uses it himself (BFH BStBI.II 235 (1971); Minister des Relations exterieures, Reponses a M. Bockel, 36 Dr. Fisc. Commn. 1956 (1984). All that he imparts is a conclusion .....

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ncerning industrial, commercial and scientific experience is, whether there is any imparting of knowhow or not. If there is no alienation or the use of or the right to use of any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as royalty . The services may have been rendered by a person from own knowledge and experience but such a knowledge and experience has not been imparted to the other person as the person retains the .....

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