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TMI Blog2019 (12) TMI 1523X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to VIVO's customers and the applicant-company made one-time upfront payment of Reais (Rs.) 12.70 million (Twelve million and seven hundred thousand Reais) to VIVO as premium for the grant of the exclusive right to offer the ring back tone services to VIVO's customers for a period of five years. The agreement also specifies the revenue share at agreed percentage to be paid by VIVO to the applicant in respect of ring back tone services that the applicant would provide to VIVO. 2. The applicant has filed an application before the Authority for Advance Rulings (Income-tax), New Delhi on December 9, 2010, seeking a ruling on the applicability of withholding tax provisions of the Income-tax Act, 1961, relating to one-time premium paid by the applicant-company to the telecom operator in Brazil. 3. The applicant has sought ruling on the following questions : "(a) Whether, based on the facts and circumstances of the case, particularly in view of the fact that the payment pertains to business proposed to be carried out outside India, the proposed payments of Rs. 12.70 million by the applicant to VIVO for the grant of exclusive right to offer ring back tone Services to VIVO&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al services, payable by a person who is resident in India except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. 6.3 It is asserted that VIVO does not carry on any business activities in India and has no permanent establishment in India so no business income deems to accrue or arise in India. 6.4 It is stated that even if the right in relation to access to user data base of VIVO would fall under clause (iv) of Explanation 2 to section 9(1)(vi) which pertains to "the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill" so that the payment would be considered to fall under the definition of royalties and the same may be considered to fall in the exception contained in section 9(1)(vi)(b), and therefore the same is not taxable in India. Attention is invited to the provisions of section 9(1)(vi)(b) which provides that to the extent the payment is made by a resident in respect of any right, property or information used or services utilized for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnection in India and also that the income is not considered as fees for technical services since it is used by the applicant for earning income from a source outside India. Therefore, the applicant respectfully submits that the provisions of the Explanation to section 9(2) would not apply. 6.9 The learned authorised representative mentions that section 90 of the Act provides that the provisions of the Act or the provisions of the double taxation avoidance agreement, whichever is more beneficial to the assessee can be applied. In the instant case, VIVO being tax residents of the Brazil, the provisions of the India-Brazil tax treaty would be applicable. 6.10 The learned authorised representative explains that the definition of royalty under the India-Brazil tax treaty is similar to the definition of royalty under the Act, the extract of which is given below : "(3) The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinema tography films, films or tapes for television or radio broadcasting), any patent, trade mark, design o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as consultancy in nature. Thus, the applicant submits that the fees could be considered as "fees for technical services" in accordance with the provisions of the India-Brazil tax treaty. However, as per section 90, the provisions of the Act or the Tax treaty, whichever is more beneficial to the applicant shall apply and since the payment is not taxable in India under the Act, the same may not be considered as taxable in India. 6.14 Lastly, it is argued that the business profits would be taxable in India only if VIVO has a permanent establishment (PE) in India through which it carries out activities in India. As per article 5 of the India-Brazil tax treaty, a permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. A fixed place of business includes a place of management, a branch, office, factory, warehouse, a farm, etc. Further, to conclude that a fixed place permanent establishment exists, an overseas entity must have a right to the work place whether legally or otherwise or should carry on its business through a fixed place in India. 6.15 It is stated that VIVO does not have a permanent establishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign company and the expenses being incurred for earning income abroad, the source would be said to be outside India. - In the case of GVK Industries Ltd. v. ITO [2015] 371 ITR 453 (SC) ; [2015] 54 taxmann.com 347 (SC) attention was drawn to the following para of the decision to observe that the source would be the payer (page 467 of 371 ITR) : "22. The principal provision is clause (b) of section 9(1)(vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee, i. e., the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down the principle what is basically known as the 'source rule', that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The clause further mandates and requires that the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at its income earned in subsequent years out of the agreement and after acquisition of rights for providing ring back tone services are from a source outside India. 7.3 Again, without prejudice to the above two views, it has been further stressed that the payment made by the applicant can be termed for rendering technical, consultancy services and is therefore chargeable under section 9(1)(vii) of the Income-tax Act, 1961 as fees for technical services and though contended by the applicant, the provisions of section 9(1)(vi)(b) of the Income-tax Act providing for an exception, is not applicable to the case of the assessee, in the given facts of its case. 7.4 The Revenue submits that the applicant-company is the owner of the platform as well as the know-how for rendering of ring back tone ser vices with technical characteristics and functionalities and the applicant- company has utilized the information/rights provided by VIVO following provision of ring back tone services in India ; as it carried out all the functions for the purpose used its assets including IP and undertook all risk for the purpose. Therefore, the income earned consequent and subsequent to the agreement between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com operator customers : - The applicant and the telecom operator enter into a contract for providing "integrated services" to the end user of the telecom operator. - The applicant owns the hardware (server) and the software plat form to be used for this purpose. The server has to be deployed at the location of the telecom operator. - Such hardware and software are not licensed to the telecom operator. The telecom operator has no rights over the hardware and the software, which remain the exclusive property of the applicant. The product intellectual property remains with the applicant. - The telecom operator and/or the applicant then sources content to be used as ring back tone from independent third parties for a fee. Such a payment of fee to the owner of the content enables the applicant to offer the content as ring back tone for use by the telecom operator's end user. The content is customized by the applicant for use as an ring back tone using the applicant's software and resources and is then deployed on the server located at the site of the telecom operator. - The end customer makes a request for the ring back tone via a text massage. - The telecom operato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es-RBT', pursuant to the provisions of this agreement ; (iv) The company is the owner of the platform as well as the know- how for the rendering of 'ring back tones services-RBT', with technical characteristics and functionalities that differ from one another, classifying them as 'value added services-VAS', pursuant to the definition provided in section 1 below : (v) The company was awarded by the RFP (request for proposal) process launched by VIVO as the provider of the "ring back tones" services ; (vi) The company has full acknowledgment that one of the conditions of the RFP (request for proposal) process launched by VIVO relates to the fact that the ring back tones services shall be provided by a Brazilian subsidiary ; (vii) In order to fulfil the requests of the RFP (request for proposal) the company has already started the process of incorporating its subsidiary in Brazil ('On Mobile Brazil'), process that shall be concluded up to 30(thirty) days from the execution date of this agreement, and it is now provided that On Mobile Brazil, jointly with the company, will also be entitled to the rights and obligations set forth herein, except for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hold harmless the company from any claims, damages and costs arising from not properly licensed content or arisen from VIVO's failure to comply with its contractual obligation with the content provider. 5.3 VIVO shall be responsible for sourcing content for the ring back tone services that are suitable for the targeted audience, and for avoiding to provide content which is illegal or violates any applicable laws, and shall provide it to the company in the format specified by the company, along with the metadata pertaining to the content. 5.5 Company shall be responsible for the management of each and every content provided by VIVO to the company for the ring back tone services under the terms of the present agreement. . . . 7. Obligations and responsibilities of company 7.14 To develop and maintain constantly and regularly updated and/or modify, at its sole expenses, the ring back tones services that will be made available to the customers of VIVO, using for that purpose the information pertaining to the knowledge and experience related to its customers. . . . 7.1.21 To transfer to VIVO and/or a new company that VIVO may indicate, the whole database obtained through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs received by VIVO, from subscriptions of the ring back tones services and sales of content on a gross revenue up to Rs. 261,315,000 (two hundred and sixty-one million, three hundred and fifteen thousand reais) ; 12.3.2 Revenue share of 20 per cent. (twenty per cent.) of the total net earning received by VIVO, from subscriptions of the ring back tones services and sales of content on a gross revenue from Rs. 231,315,001(two hundred and thirty-one million, three hundred and fifteen thousand and one reais) up to Rs. 609,735,000 (six hundred and nine million, seven hundred and thirty-five thousand reais) ; 12.3.3 Revenue-share of 15 per cent. (fifteen per cent.) of the total net earnings received by VIVO, from subscriptions of the ring back tones services and sales of content on the gross revenues above Rs. 609,735,001 (six hundred and nine million, seven hundred and thirty- five thousand and one reais). . . " 8.8 In the statement of relevant facts annexed to the application before the Authority for Advance Ruling, it is stated as under : "Background of the one-time upfront payment by the applicant to VIVO VIVO is an established telecom operator in Brazil. It has developed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. . . " 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, 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 trade mark or similar property ; (iv) the imparting of any information concerning technical, indus trial, commercial or scientific knowledge, expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and information and at the time of payment the said right or information was not used by the applicant and the said information resides in the server of VIVO but in view of Explanation 5, the said payment in the hands of VIVO would give rise to royalty as characterised in Explanation 2(iv). The premium paid thus is squarely covered under Explanations 2 and 5. 8.14 The only question now remaining to be answered is whether the said payment is covered under the exclusion clauses under section 9(1)(vi)(b). The applicant insists that its case is covered under exclusions provided under section 9(1)(vi)(b). The exemption is available to a resident person who is paying royalty in respect to any right, property or information used or services utilized for the purposes of a business or profession carried on by a person outside India or for the purposes of making or earning any income from any source outside India. Admittedly there is no business or profession carried out by the applicant in Brazil prior to signing of the partnership agreement. 8.15 As per the partnership agreement, the entry into the Brazilian market is consequent to payment of premium and the future revenue streams from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d then VIVO's exchange conveys the request to the applicant's server. The applicant's server recognises the request and sends the requested content through VIVO's exchange to the customer. 8.18 Therefore, only when the product/services are developed and delivered to VIVO as per VIVO's satisfaction and the customers subscribe to these products, VIVO may get additional revenue from these value added products or may attract new customers and at that point of time the revenue is shared with the applicant and that revenue is admittedly the business income of the applicant which has been offered for taxation by the applicant in India. 8.19 The customers of VIVO continue to be the source of income for VIVO. The customers are never the customers of the applicant. Even after providing value added products, they are still customers of VIVO. Before providing any services, no new source can be said to be created for the applicant. VIVO cannot be receiving payment from its own source for sharing its own database/information. The payment of premium is anterior to creation of the so-called new source for the applicant. The right of applicant to share revenue stems from the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The location or situs of a source of income is another aspect. The third aspect is the accrual of the income. Though it is true, as held by Kania C. J., speaking for a Constitution Bench of the Supreme Court in CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC) at page 479, that the place where the source of income is located may not necessarily be the place where the income also accrues, that question is not material in the present case because herein we are concerned only with the question as to the location of the source. The real question is whether the export sales proceeds received from goods manufactured and exported from India constitute a source inside or outside India. To decide the same we have to take a pragmatic and a practical view and not approach the question from a theoretical perspective. Section 9(1)(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessee's products are sent outside India under such contracts. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this basis and that portion of the income which is attributable to the export sales should qualify for the second exception. This argument is only a limb of the main contention that the income arises from the export sales and the source of the income is located outside India. We have already expressed our difficulty in accepting that argument. It is true that the profits arise both from the manufacturing activity and from the sale. There are several authorities dealing with this question in the context of cases where an assessee had its manufacturing facility in British India but sold the goods outside British India. In such cases, it has been held that the profits arose both from manufacture and the sales and that part of the profit which arises from sales outside British India would be exempt from tax : See Anglo-French Textile Co. Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC) and CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC). But these cases are not of any assistance to the assessee in the pre sent case since the contention here is that the source of income is the export sales and the export sales are located outside India. For these reasons we are unable to hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee needs to specifically demonstrate that the technical ser vices were utilised in a business carried on outside India in order to fall under the exception." 8.23 Though the decision quoted (supra) was in the context of fee for technical services under section 9(1)(vii)(b), we are in agreement with the logic of the hon'ble High Court of Delhi, as the provisions are parimateria with section 9(1)(vi)(b) and thus relevant in the case before us. 8.24 The applicant has its expertise and software professionals working in India on ring back tone services. The Revenue had sought some clarification from the applicant on the nature of services provided by the applicant and in its reply dated April 19, 2012, the following relevant replies were offered by the applicant are reproduced below : 12. How ring back tone services are deployed by OGL (applicant). Further provide the following information : 12.1 The place where the software development and customization has taken place (ans) : The software development and customization is undertaken by OGL development centres in India. 12.4 The place where the testing of the ring back tone services was carried out before being d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the royalties being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, and the right of property in respect of which the royalties are paid is effectively connected with such permanent establishment. In such cases the provisions of Article 7 shall apply. 5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the obligation to pay the royalties was incurred, and such royalties are borne by such permanent establishment, then such royalties shall be deemed to arise in the State in which the permanent establishment is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to its mobile services which was being made available to the applicant and this valuable right has been shared with the applicant on exclusive basis and this is clearly in the nature of commercial information and experience which is shared with the applicant and the consideration paid is thus covered under article 12(3) of the treaty. 8.32 The case law relied upon by the applicant are distinguished below : - In the case of Aktiengesellschaft relied on by the applicant, the receipts for special engineering services were held to be exempt under the proviso to section 9(1)(vi) as the amount was paid under a pre- 1976 agreement. Further in that case royalty was paid out of export sales. In the instant case the premium is paid the source of which lies in India. Hence the decision does not help the applicant. - In the case of Titan Industries Ltd. v. ITO, the assessee-company was engaged in the manufacture of watches and was selling the same under its patent name Titan. An associate company of the assessee, incorporated in Singapore, was engaged in promoting the sales of "Titan" watches in the Asia Pacific region. The assessee got its patent name registered in Hong Kong through " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business is carried on by the applicant at the time of making the premium payment and the income earning activity is located in India therefore the facts are clearly distinguishable. - In GVK Industries v. ITO, the assessee-company was incorporated for the purpose of setting up a 235 MW gas based power project. With the intention to utilize the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie-up the required loan, the assessee sought services of a consultant and eventually entered into an agreement with NRC, a Switzerland based company. With the advice of NRC, the assessee-company approached the Industrial Development Bank of India (IDBI) acting as the lead financier for its rupee loan requirement and for a part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services, the NRC sent invoice to the assessee-company for payment of success fee. The assessee- company thereupon approached the Assessing Officer, for issuing a "no objection certificate" to remit the said sum duly pointing out that the NRC had no pl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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