TMI Blog2007 (12) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... provides value added services that support the development of free, fair and competitive global diamond markets. According to the petitioners it is a foreign company and a non-resident for the purpose of the Act. 2. Gemological Institute of America (GIA) established in 1931 is the world's largest and the most respected institute of gemological research and learning. In August, 2006 GIA announced an expanded consolidation service known as GIA 'Lab-Direct' wherein it proposed to build an international network of drop-off and shipment points to assist the maximum number of clients in moving their goods to the GIA Laboratory in a safe, expedient and cost-effective way. GIA grades the diamonds and issues a certificate stating the properties such as colour, crate, etc., of the diamonds. World-wide, the certificates issued by GIA are regarded as evidence of the quality of the diamonds. 3. Indian customers interested in having diamonds graded by GIA are able to drop their stones off at the most convenient authorized "Lab Direct" consolidator/participants, who provide prompt and secure transportation to and from one of GIA's Laboratory located in USA. The role of participants/conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x at source for the financial year ending on 31 st March, 2007. In the said application the petitioner had submitted the grading report charges collected by them from Indian clients cannot be said to be liable to tax as per the provisions of the Act and the Double Tax Avoidance Agreement (DTAA) between India and Singapore. The Respondent No.2 by its order dated 13 th November, 2006 did not accept the contention of the petitioner and held that the activities indicate that this is a transfer of commercial experience in the shape "Diamond Grading Report" with respect to a particular diamond and is covered by definition of "Royalty within the meaning of Explanation 2(iv) of Section 9(1)(vi) and Article 12 of the DTAA between India and Singapore. and accordingly passed the consequential order. According to the petitioners the impugned order dated 13 th November, 2006 was only valid upto 31 st March, 1997 and was in fact passed close to the end of the Financial Year of 2006-2007. The petitioners believed that the order may be reviewed at the time of adjudicating its application for grant a certificate under Section 197(1) of the Act for the financial year ending on 31 st March, 2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prayed for. 7. Reply has been filed on behalf of the respondents by R.K. Jalali, Deputy Director of Income Tax (IT)-1(2). In the reply it is contended that diamond grading report issued by GIA is considered the world's premier gemological gradation report as they use most advanced technology to determine the quality and authenticity of diamond. The customers get this information in the form of grading report. The website of GIA states that it discovers, impart and applies gemological knowledge to ensure public trust in gem and jewellery. GIA after repeated garding and examination by a minimum of 4 highly trained and experienced diamond graders and gemologist, who independently examine such diamonds, issues the grading report. The preliminary grader gives the opinion about the diamond's clarity, polish and symmetry, and then plot necessary clarity, characteristic on the diagram most representative of the diamond shape and faceting style which is selected from a database of hundreds of digitally stored diagrams. Second grader performs independently the above steps and depending upon the various parameters as well as grading opinion agreement, the diamonds are finally graded. All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r technical services" as used in this Article means payment of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provisions of such services through technical or other personnel) if so such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person." 9. Under the Income Tax Act, Explanation 2 of Section 9(1)(vi) defines "Royalty" is defined as under:- "For the purposes of this clause, royalty means consideration (including any lump slum consideration but excluding any co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry "experience" is explained as "The process or fact of personally observing, encountering or undergoing something." As per the dictionary meaning of the term "experience" it is clear that "experience" is a cumulation of knowledge and observation gathered over a period of time. Term "experience" has also been judicially interpreted by the Supreme Court in Shesharao Jangluji Bagde vs.. Bhaiyya s/o Govindro Karale [1991]Supp. (1) SCC 367 as under (page371):- "Normally when we talk of an experience unless the context otherwise demands, it should be taken as experience after acquiring minimum qualifications required and will, therefore, necessarily have to be posterior to the acquisition of the qualification." 12. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial or commercial experience" from assignor to the assignee for a consideration. Therefore, to fall within the meaning of the term royalty under Article 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 information shall be for the stipulated period in accordance with the terms of the contract." 15. Article 12(3)(a) of the DTAA is a tax liability and as per has to be interpreted on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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