TMI Blog2016 (6) TMI 547X X X X Extracts X X X X X X X X Extracts X X X X ..... view 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 by the assessee as royalty.- Decided against assessee. - IT(TP)A No.6/Bang/2011 - - - Dated:- 29-4-2016 - SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Appellant : Shri Chavali S. Narayan, CA For The Respondent : Shri G.R. Reddy, CIT-I(DR) ORDER Per Vijay Pal Rao, Judicial Member : This appeal by the assessee is directed against the assessment order dated 29.10.2010 passed u/s. 143(3) r.w.s. 144C(5) of the Income-tax Act, 1961 [in short the Act ] in pursuance 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications and application notes. 5. Assistance with evaluating new business opportunities. 6. Provision of opening up business relations with foreign countries. 7. Marketing, market research and market analysis including advice on questions of advertising in local media and the coordination of the latter with other related firms but excluding any services covered by Agreements between Group companies relating to Intangible Property. 8. Sales support. 9. Development of trading relationships with agents, customers and suppliers. 10. Assistance with strategic management in order to maximize the long term future 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation. 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 from TNT India under MAS agreement for providing such MAS services. The amount accruing to the assessee under the MAS agreement is a business income and since the assessee does not have a PE in India, therefore, the said income will not be chargeable to tax in India in accordance with Article 7 of Indo-UK DTA. The ld. AR has emphasized that the services provided by the assessee under the agreement does not amount to imparting commercial knowledge or any information concerning technical, industrial, 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 purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral services may be a know-how for the other entity depending upon the nature of requirement and use of the services by the recipient. He has further submitted that the assessee did not 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 of royalty. The ld. DR has submitted that the decision of Mumbai Bench of the Tribunal in the case of GECF Asia Ltd. (supra) would not help the case of the assessee as the Tribunal has set aside the issue for examination at the level of the AO, for want of necessary details and information, whereas in the case of the assessee, the AO has already examined the facts and arrived at a conclusion that payment is a royalty. The ld. DR has then referred to confidential clause of the agreement and submitted that it s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information was also not provided about the cost incurred by the assessee in rendering these services. 14. Thus, it is clear that the assessee was asked to give the breakup of payments received from each of the various services/information rendered by it. However, the assessee did not furnish such information on the ground that no break-up is available as it is a composite contract. No information was provided about the cost incurred by assessee in rendering these services. Even before us, the assessee has not provided the break-up of the payments received for various services/information provided to TNT 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 the lower authorities making a specific observation regarding non-furnishing of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 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 received permission in writing form the other Party to disclose; or 6.1.4 which such Party is required to disclose pursuant to applicable law or regulation. 16. Clause 1.1 of the agreement stipulates that cost means direct and indirect costs and clause 3.1 provides consideration for provision of the services with an amount as set out in Schedule-3 as under:- Schedule 3 The Allocation of the Fee 1. Direct Charges Direct charges shall be made on the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (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, model, design, secret formula or process or trade-mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trademark or similar property; (iv) the 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 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 activities referred to in [subclauses (i) to ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 experience and the payment of any kind received as consideration for use of, or right to use, any industrial, commercial or scientific equipment. 18. In the case in hand, it is not the case of Revenue that the payment received by the assessee is a consideration for use or right to use for any copyright, patent, trademark, design, etc. Even otherwise, from the description of services as provided in Schedule-2 of the agreement, it was not for use or right to use any copyright, patent, trademark, design or model, plan, secret formula or process. Thus, the case of assessee has to be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 art. 12 of the DTAA it must envisage the person who is the owner of any intellectual property right, designs, or model, plan, secret formula or process, etc. 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 information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (c) such use or right to use of such property or informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial 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 for by the petitioners. 19. It is not the nomenclature of the agreement, but the substance and contents and terms and conditions of the agreement which are material to ascertain the real intention of the parties and the nature of mutual obligations of the parties. As it is manifest from the list of services as provided under Schedule-2 that some of the services are clearly for new process information including specification and application, evaluation of new opportunities, management information and 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 India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction : -- Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular 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 this information is provided under the condition that the customer not disclose it without authorisation and where it is subject to any available trade secret protection. 11.6 In business practice, contracts are encountered which cover both know-how and the provision of technical assistance. One example, amongst others, of contracts of this kind is that of franchising, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: Contracts for the supply of know-how c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Convention has reiterated this view on difference between royalty and rendering of services in the following manner: Imparting of experience: Whenever the term royalties relates to payments in respect of 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial 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 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 by the assessee as royalty. 22. In the result, the appeal by the assessee is dismissed. Pronounced in the open court on this 29th day of April, 2016. - - Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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