TMI Blog2018 (8) TMI 2091X X X X Extracts X X X X X X X X Extracts X X X X ..... ces rendered by Startpoint was in the nature of moderator for an online game developed by the assessee. As a moderator, certain services are expected to be performed by Startpoint. The results of moderation are given in the form of a report. By giving the results of moderation in the form of a report, assessee does not make payment to Startpoint by the Assessee as a payment for use of or right to use information concerning industrial, commercial or scientific expertise. Therefore, even under this clause of the definition of royalty , the payment in question cannot be said to be royalty and chargeable to tax under Article 13 of the DTAA. Thus we hold that the payment in question cannot constitute royalty under Article 13 of the DTAA. Consequently, the payment in question cannot be brought to tax. Since the sum in question is not taxable in India, the provisions of section 40(a)(ia) of the Act are not applicable and therefore disallowance made by the revenue authorities cannot be sustained. The same is directed to be deleted. Ground No.1 is allowed. - ITA No.2139/Bang/2017 - - - Dated:- 3-8-2018 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the meaning of section 9(1)(vii), Explanation 2 of Income-Tax Act, 1961 [ the Act ] and therefore the assessee ought to have deducted tax at source while making payment to Startpoint. Since the assessee did not deduct tax at source, the AO disallowed the claim of assessee for deduction of the aforesaid sum while computing income from business and invoking the provisions of section 40(a)(ia) of the Act. 4. Even before the AO, the assessee submitted that the payment in question was in the nature of fees for technical services and therefore the assessee was obliged to deduct tax at source u/s. 195 of the Act. The assessee, however, pointed out that there was Double Taxation Avoidance Agreement (DTAA) between India and Philippines and as per section 90(1) of the Act, the taxation in the hands of Startpoint which a tax resident of Philippines should be judged in terms of the aforesaid DTAA. The assessee further pointed out that as per the aforesaid DTAA, there is no article dealing with fees for technical services and therefore the payment by the assessee to Startpoint will constitute business income in the hands of Startpoint. The assessee pointed out that as per Article 7 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling with in any of the other Article of DTAA, tax shall be payable only in Philippines, where the income arises in the hands of resident of Philippines. Even in that event of the income being consider as other income, the same is not chargeable to tax in India. As already stated, this argument was also not considered by the AO. 7. Before the CIT(Appeals), the assessee reiterated the submissions as were made before the AO and referred to in the earlier part of this order. The CIT(Appeals), however, was of the view that the amount is chargeable to tax under Explanation 2 to section 9(1)(vii) of the Act and therefore the action of the AO in invoking the provisions of section 40(a)(ia) of the Act was correct. 8. Without prejudice to the aforesaid conclusion, the CIT(Appeals) also called upon the assessee to show cause as to why the sum in question should not be taxed as royalty. The assessee, in reply to the aforesaid query, submitted that the fees in question were paid for game moderation services to Stratpoint Technologies Inc. [ Startpoint ]. The Assessee pointed out that as per the Agreement and scope of work between the Assessee and Startpoint, the main scope of work to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 sub-clauses (i) to (iv), (iva) and (v). 10. The Assessee also pointed out that 'Royalty' as per as per Article 13 of India-Philippines DTAA has been defined as follows: the term royalties 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 cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience . 11. The Assessee pointed out that the payment made to Startpoint is tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t limitation all Deliverables resulting from services performed by Service Provider on and after the Commencement Date but before the effective Date, if any, provided all undisputed payments due and owning to the Service Provider have been made in fill. Service Provider hereby irrevocably transfers and assigns to Zynga. and agrees to irrevocably transfer and assign to Zynga, all right, title and interest in and to the Deliverables including without limitation all Deliverables resulting from Services performed by service Provider on and after the Commencement Date but before the Effective Date, including all worldwide patent rights (including patent applications and disclosures), copyright rights, rights to secure copyrights, mask work rights, trade secret rights, know-how, and any and all other intellectual property or proprietary rights (collectively, Intellectual Property Rights ) therein, provided all undisputed payments due and owning to the Service Provider have been made in full. At Zynga's request and expense, during and after the term of this Agreement, Service Provider agrees to execute documents or take other reasonable steps in order that Zynga may acquire, transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such right is called or generally referred to as a moral right, in all cases including without limitation all Deliverables resulting front services performed by Service Provider on and after the Commencement Date but before the Effective Date, if any. 3.6 Related Rights. To the extent that Service Provider owns or controls (presently or in the future ) any patent rights, copyright rights, mask work right, trade secret rights, or any other intellectual property or proprietary rights that block or interfere with the rights assigned to Service provider under this Agreement (collectively, related Rights'), Service Provider hereby grants or will cause to be granted to Zynga a non-exclusive, royalty-free, irrevocable, perpetual, transferable, worldwide license (with the right to sublicense) to make, have made, use, offer to sell, sell, import, copy, modify, create derivative works based upon, distribute, sublicense, display, perform and transmit any products, software, hardware, methods or materials of any kind that are covered by such related Rights, to the extent necessary to enable Zynga to exercise all of the rights assigned to Zynga under this Agreement. 4. CONFIDENTIA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned above that the payment by the assessee to Stratpoint Technologies Inc is actually in the nature of royalty. As per Article 13 of the India-Philippines DTAA, payment of royalty to a company in Philippines is taxable in India. Therefore, the appellant was liable to make TDS u/s.195 of the I.T Act on payment of Rs. 5,660,370/- to Stratpoint Technologies Inc. As no tax has been deducted by the appellant the mischief of provision of section 40 (a)(i) will certainly get attracted. 13. The CIT(Appeals) also placed reliance on the decision of the ITAT Bangalore in the case of ABB Ltd. 83 taxmann.com 865 to support his conclusion that the payment in question was in the nature of royalty. 14. Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. The ld. counsel for the assessee reiterated the submissions as were made before the CIT(Appeals). The ld. DR relied on the order of CIT(Appeals). 15. We have given a very careful consideration to the rival submissions. The first aspect which we notice is that the CIT(Appeals) having come to the conclusion that the payment in question was in the nature of FTS within the meaning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scientific work, etc. It cannot also be for the use of any patent, trademark, etc. It cannot also be for the use of or right to use, industrial, commercial or scientific equipment. If at all, it can be analysed as to whether it can be for the use of or right to use information concerning industrial, commercial or scientific expertise. We have already seen the nature of services rendered by Startpoint. The services rendered by Startpoint was in the nature of moderator for an online game developed by the assessee. As a moderator, certain services are expected to be performed by Startpoint. The results of moderation are given in the form of a report. By giving the results of moderation in the form of a report, assessee does not make payment to Startpoint by the Assessee as a payment for use of or right to use information concerning industrial, commercial or scientific expertise. Therefore, even under this clause of the definition of royalty , the payment in question cannot be said to be royalty and chargeable to tax under Article 13 of the DTAA. The ld. counsel for the assessee has in this regard drawn our attention to the decision of the Hon ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of the qualification . (P. 371) The grading certificate which is issued does not involve any transfer of commercial interest to the party paying or getting the right to use the experience of G.I.A. There is also no transfer of any skill or knowledge of GIA to the customers in the issuance of grading reports. The payments 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. For that purpose we may consider the expression use as defined in various dictionaries. In the Oxford English Reference Dictionary it is defined as Exploit for one s own ends, Employ, apply. In Chambers Dictionary it is defined to mean Use to employ for some purpose. Apply to one s own purpose. The act so employing, using or putting into service. The nature of the transaction between GIA and its client does not invest the party making payment with any right as regards the use of the cumulated experience of GIA. The payment in question does not involve a payment for the use or the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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