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TMI Blog2023 (12) TMI 1339X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. In all the appeals of the assessee similar grounds and issues have been raised, therefore, same were heard together and are being disposed of by way of this consolidated order. For the sake of ready reference, grounds raised in all the years are as under:- ITA No.6509/Mum/2016 (A.Y.2009-10) "1. Whether on the facts and in circumstances of the case the learned CIT(A) erred in holding that the services rendered under the SPS as not falling within the purview of Royalty under para 3(a) and FTS under para 4(a) and para 4(c) of the Indo - UK Treaty. The learned CIT(A) has held that the SOC contract (2005-2008) and SOC contract (2008-11) are separate whereas the assessing officer has brought out in the order that the services rendered before and after the two sets of agreement were one and the same. 2. Whether on the facts and in circumstances of the case the learned CIT(A) erred in holding that the services rendered under the SPS as not falling within the purview of Royalty under para 3(a) and FTS under para 4(a) and para 4(c) of the Indo - UK Treaty despite the fact that the assessee during the assessment proceedings as well as the DRP proceedings had not made a claim to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that diamonds which are graded are also inscribed with the inscription and carry a trademark. 4. Without prejudice to Ground No 3, the learned Assessing Officer erred in taxing the receipts from grading services at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (AA) of clause (b) of sub-section (1) of section 115A of the Act. 5. The learned Assessing Officer erred in treating the receipts from DTC Accredited Business Services as Fees for Technical Services and Royalty under Article 13 of the India-UK tax treaty. 6. Without prejudice to Ground No 5, the learned Assessing Officer erred in taxing the receipts from DTC accredited business services at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (BB)/ (AA) of clause (b) of sub-section (1) of section 115A of the Act. 7. The learned Assessing Officer erred in applying the tax rate of 15 per cent to royalty income received from Forevermark on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices ('FTS") under Explanation 2 to section 9(1)(vil) as well as under para 4 of the India- UK tax treaty and Royalty under para 3 of Article 13 of the India-UK tax treaty 2 Without prejudice to Ground No 1, the learned Assessing Officer erred in taxing the receipts from SPS at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (BB)/ (AA) of clause (b) of subsection (1) of section 115A of the Act. 3. The learned Assessing Officer erred in granting credit for taxes deducted at source of Rs 117,554,727 as against Rs 122,782,473 claimed in the return of Income. 4. The learned Assessing Officer erred in charging interest under section 234B of the Act. 5. The learned Assessing Officer erred in law and on facts in initiating penalty proceedings under section 271(1)(c) of the Act. ITA No.1833/Mum/2017 (A.Y/2013-14) 1 The learned Assessing Officer erred in assessing total income at Rs 87,95,08,896 as against Rs 1,15,41,918. 2. The learned Assessing Officer erred in treating the receipts from Supply Planning Services ("SPS' ) as Fees for Technical Services ('FTS") under Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SPS and not based on the earlier agreement as both stood at the different footing. 5. During the course of original assessment proceedings for AY 2009-10, AO passed the draft assessment order dated 30/12/2011 u/s. 143(3) read with section 144C(1) of the Act by making the following additions to the total income of assessee. Sr. No. Particulars Amount (Rs.) 1 Receipts from SPS taxable as fees for technical services ('FTS") and/ or royalty under Article 13 of the DTAA between India and UK 1,02,62,21,488 2 Receipts from grading services taxable as Royalty under Article 13 of the DTAA between India and UK 4,00,703 3 Receipts from DTC-ABP taxable as FTS and/ or royalty under Article 13 of the DTAA between India and UK 54,35,104 Total 1,03,20,57,295 6. Assessee filed objections before the Dispute Resolution Panel ('DRP') against the draft assessment order under section 143(3) read with section 144C(1) of the Act. The DRP vide its directions dated 7 September 2012 upheld the order of the AO Thereafter, the AO passed the final assessment order dated 23/10/2012 assessing the total income at Rs. 1,03,49,31,770/-. 7. Aggrieved by the assessment order, asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant assessment order refers to the provisions of the old contract with Sightholders and contents of para 3 of page 4 of the assessment order witness these basis avoidable mistakes. There is no discussion either in the order of the AO or in the directions of the DRP to the nature of impugned SPS services or homologous nature of these services to the VAS services. If they are comparable to VAS services, how the other Core Services or Growth Services specified in the old contract are impliedly made available indirectly through Extranet Services allowed under the new contract. It is also required that the revenue ought to have explained on the discontinued services since the old contract with the Sightholders. It is explained before us that the assessee stopped supplying services relating to marketing and growth related areas of the business. In our opinion, it is for the AO and the DRP to come to the fresh conclusions on a quality of services rendered by the assessee under the new contract and they constitute technical services for qualifying the provisions of Article 13 of the India UK Tax Treaty. 22. The ITAT, while taking into consideration the differences in both the contracts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers for the year 2008-2011 contract. Since, these former sightholders wanted to maintain business relationship with the assessee, they had entered into a DTC-ABP agreement with the assessee to qualify as DTC accredited business partners. The assessee has claimed that receipts of these services are not taxable. However, the ld. AO held that the receipts are taxable both as FTS and royalty under Article 13, because assessee has been sharing experience which enables the recipient to use it for its business purposes. The "make available" element is embedded in sharing of experience. Further DTC-ABP is an extension of value added services which is also taxable as FTS. Thus, all the elements of FTS and royalty stands satisfied. 26. The ld. CIT (A) on the issue of service rendered on SPS held that Tribunal in A.Y.2009-10 had clearly observed that scope of services provided under the SOC contract for the years 2008- 2011 were not similar to the scope of services rendered in the earlier contract 2005-2008 and it was specifically directed by the Tribunal to the AO to verify and pass assessment order in light of the scope of services rendered under SOC contract for the years 2008-2011. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment for the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. 3.15. Further, for taxability of the sum as royalty or FTS under the provisions of Income tax, it is not necessary that the non-resident should have a place of business in India or to have rendered any services from India. It has been made clear in the Explanation to section 9(2) inserted by the Finance Act, 2010 with retrospective effect from 1.6.1976 as per which the income is chargeable in India whether or not, the non resident is rendering services in India, or has a place of business or business connection in India. Under the provisions of treaty also, royalty and FIS are chargeable to tax in the hands of non resident whether or not he has any Permanent Establishment (PE) in India. Therefore, the nature of income is of great significance while considering taxability because in case the payment is considered as business income in the hands of the non-resident, the payment under the provisions of treaty can be taxed in India only if the non resident has PE in India. There is no dispute that the assessee does not have a PE in India. Further, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and fees for technical services. 3. For the purposes 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 concerning industrial, commercial or scientific experience, and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owledge, expertise and skill could be extended to the SoC contract 2008-2011 since the scope of services under the old contract encompasses the scope of services under the new contract. While the Appellant has entered into a separate contract from the year 2008 for providing a particular set of services called as supply planning services, the nature of services is such that it is similar to the core services (excluding business sustainability services) provided by the Appellant under the SoC contract 2005-2008. 3.19. Since the Appellant was only imparting information concerning future supplies and not transferring any technical knowledge, skill, etc, in my view, the provisions of para 4(c) should not be applicable. 3.20. With respect to taxability of supply planning services as "royalty" under the Treaty, it has been observed that the AO has treated the same to be taxable under para 3(a), reproduced as under: (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n depth experience in marketing of diamonds so as to know future marketing trends. The assessee was using its global marketing experience to provide such information which was commercial in nature to the Sightholders so that they could plan their trading schedules accordingly. Therefore, in case the assessee was charging for such information, the payment has to be considered as royalty for providing information of commercial nature based on experience. However, the Hon'ble Tribunal was of the view that the real charge was for providing various marketing information through Extranet and as part of Business Sustainability and growth services and personal services provided in relation thereto. The assessee provided access to DTC information on Extranet about its global marketing programme. Such information was useful in selling of diamonds and other finished products by Sightholders. As part of supply planning tool services, the Sightholders could also seek assistance from the KAM who formed the link with DTC marketing globally and also provided assistance in service selection. As part of business sustainability services, the assessee was providing information on consumer demands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra brand or Forevermark. 3.27. The Appellant has pointed out that it had sold the Nakshatra brand in AY 2008- 09 and has offered the same to tax as long term capital gains. Hence, during the year under comsideration, the Appellant had not earned any royalty income on application or enjoyment of the Nakshatra brand. 3.28. Further, the Appellant has also argued that if the payment fails to fall within the purview of royalty, the payment of services cannot be considered as FTS, terming them to be ancillary and subsidiary. Hence, given that the services under the old contract which the Hon'ble Tribunal had construed to be in the nature of royalty do not exist in the new contract, the services rendered by KAM (given that business sustainability and growth services were absent in the new contract) should not be treated as ancillary and subsidiary to the royalty income. Further, given that the Appellant has not earned any royalty income in AY 2009-10 from the Nakshatra brand, the marketing information provided by the Appellant should not be treated as ancillary and subsidiary to royalty income. In view of the discussions, I concur with the view of the Appellant that the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionship your business has with De Beers or any De Beers group company or any division thereof Usage of the term must only and precisely be used in connection with the name or logo of the specific company contracted to be a DTC Accredited Business. If the name of this company changes, you should inform a member of the De Beers BPP team. Please note: There is no logo or "signature" designed for DTC Accredited Businesses." Thus, it is noted that the fees charged by the Appellant for "DTC Accredited Business Programme" is not for use or right to use any copyright, artistic or scientific work, patent, trademark etc. In fact as specifically pointed out in Appendix B (supra), there is no logo or signature for "DTC Accredited Business" and therefore there is no question of treating the impugned receipts towards any trademark, patent, etc) The learned AR has rightly relied upon the ruling of the AAR in the case of Cushman & Wakefield (S) Pte Ltd (305 ITR 208) (AAR) which provides that: ---------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planning tools were those capabilities derived from the DTC's unmatched regularity of assortment and consistency of supply along with its superior sales planning services, such as the Intention to Offer (ITO) and extended SoC contract period. These services aimed to offer Sightholders a stable platform to achieve clear differentiation in their operational planning and downstream commitments. Supply planning tools were chargeable services (by way of the Service fee) and consisted of * Continuity of Supply * Intention to Offer (ITO) * Consistency of boxes * Sightholder Extranet services * Third Party verification * Provision of a Key Account Manager (KAM) The Business Sustainability component of the core services aimed to ensure that diamond value is sustained through the DTC's leadership in maintaining consumer confidence and its substantial proactive and sustained investment in the market. These services were not chargeable to Sightholders and were paid by the DTC 2.8.2. Growth services (optional) Growth services were available on request and were intended to enable Sightholders to capitalise on the DTC's expertise and experience in the indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-11, DBUK charged a fee of 1.5% for every USD of boxes of diamonds purchased by the relevant sightholders. 212. In view of the above, your Honours shall appreciate that the nature of services rendered under the SoC contract 2008-2011 has considerably reduced than that of the services rendered under the SoC contract 2005-08. Year wise break-up of VAS/ SPS fees is provided as under:- Assessment Year Agreement Amount (Rs. in crores) 2006-07 VAS 90.97* 2007-08 VAS 143.26 2008-09 VAS 174.92 2009-10 SPS 102.62 2010-11 SPS 84.15 2011-12 SPS 84.64 2012-13 SPS 97.48 2013-14 SPS 86.79 *Part of the year. 2.13. As per the fee model provided at para 2.11 above, the fees charged by DBUK to the sightholders has also considerably reduced. The same is evidenced by the spreadsheet summarizing the fees earned from various sightholders during the AY2008-09 and AY 2009-10 (showing a decrease in the fees charged in the latter year). 32. Both Tribunal and ld. CIT (A) have examined both the contracts and have held that same are distinct and services rendered pursuant to both the contracts should be examined separately which AO has failed to do so. 33. Before us ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out above in terms of para 14.4 of SPS contract 2008-11, this policy statement constitutes the entire agreement between the DTC and its sightholders. 36. We agree with Ld. Counsel that the approach of the ld. AO in deciding this issue holding that there is no difference between the earlier SOC contract (2005-08 and 2008-11) is not correct and same has also been found to be incorrect by the Tribunal in the first round. From the perusal of the services, it is seen that what has been provided is intention to offer whereby assessee communicates in advance to every sight holder the aggregate value of each Box it intends to make available to the sight holder during the selling period. It also undertakes to use its reasonable efforts to ensure that, insofar as practicable, there is consistency as to the size, type, quality and colour of diamonds contained in each box in any category that it supplies during the intention to offer period. This is purely service for providing diamonds to the sight holders and such service cannot be held that some kind of technical service is being provided by the assessee on this under Article 13 of DTAA or there is any managerial, technical or consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t VAS is to be taxable only on account of the following reasons:- "Under para 3(a) of Article 13-on account of payment for various types of information of commercial nature acquired based on experience provided to Sightholders in the form of extranet services, business sustainability and growth services. Under para 4(a) of Article 13 - on account of payment attributable to the services rendered by KAM or through workshops, etc which were ancillary and subsidiary to application or enjoyment of the information, or as FTS being payment for marketing consultancy services which were ancillary and subsidiary to the application or enjoyment of Nakshatra Brand. The relevant extract of the ITAT order of A Y2007-08 is reproduced below "7.31 In view of the fore-going discussion and for the reasons given earlier, we are of the view that the payment for VAS received by the assessee has to be considered partly as royalty under para 3(a) of Article-13 being the payment for various types of information of commercial nature acquired based on experience provided to Sightholders and partly as FTS under para 4(a) being the payment attributable to the services rendered by the KAM or through wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which is of the nature of commercial information based on its experience. The assessee was not transferring the technical knowledge, skill, experience etc. but was only imparting the information concerning commercial experience. Therefore, in our view, provisions of para 4(c) will not be applicable." 42. Thus, the Tribunal has held that receipts from supply planning services do not make available any technical knowledge, skill etc., and the provisions of Article 13(4)(c) are not applicable. 43. The ld. AO has also held that the service fees received by the assessee as FTS because of provision of sightholder extranet services. He alleges this in his order that in order to ensure efficient and timely access to the sightholders extranet services not only allows sight holder to immediately utilize the services provided by the network but also allows the sightholders a secured web based information sharing and business platform offering access to assessee information plus tailored access for each sight holder to their own specific business information and process. Therefore, technical knowledge is actively made available to the sightholders. Before us, it has been submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty as held by the AO, the submission of the ld. DR was that assessee providing such information well in advance based on its in-depth experience and therefore, such information helps to understand future marketing trends which enables the sightholders to plan their trading schedule, therefore, such information has a market value as it helps in the furtherance of the business. Accordingly, the case of the department before us is that the assessee provides plans to the sightholders and therefore, it falls within the ambit of royalty. 46. First of all, we find that there is no mention that there is no mention of the word 'Plan' under the SoC contract 2008-2011. The fees charged by assessee are merely for providing the basic information in relation to the type and quality of diamonds that assessee may offer for sale to the sightholders in a particular period so that the sightholders is assured of the quality of the diamonds it intends to purchase. Thus, basic information is shared with the sightholders and sharing of such basic information in relation to the goods assessee would offer for sale during a particular period could not be construed as "Plan" for commercial explo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olders and/or DTC Sightholder' cannot be accepted because selection of a person as 'Sightholder of DTC' is a competitive process wherein following criterion need to be satisfied by the person concerned: 1. Criteria A. Mandatory Criteria - Pass or Fail Criterion 1 Financial Standing and Reliability Criterion 2: General Business Reputation Criterion 3. Compliance with the Diamond Best Practice Principles and associated Assurance Programme B. Relative Performance Criteria Criterion 4. Core Strengths (Weighting 30%) Criterion 5. Distribution and Marketing Ability (Weighting 50%) Criterion 6. Technical Ability (Weighting 20%) Other Considerations ('Sightholder Considerations') 49. This has been detailed in the notes placed in the paperbook from pages 38-47. Thus, where a person is selected as "Sightholder" by DTC it is but natural to designate him with the trademark of "Sightholder" and/ or 'DTC "Sightholder". But this does not come based on payment of any service fees. As mentioned in Para 8 of the Service Contract, the "Sightholder" is required to give certain undertaking to DTC e.g., the trademark "Sightholder"/ "DTC Sightholder" and any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices will not fall within the ambit of Article-12...." 51. The Hon"ble Jurisdictional High Court in the case of Diamond Services International (P) Ltd. (169 Taman 201), observed AND HELD as under:- "9. 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 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 11. From the impugned order of the authorities what emerges is that GIA by using its experience, does the work of diamond grading. In other words, parts in favour of the person seeking its specialised knowledge as to the particular diamond in the form of grading cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur grading as defined by the Gemological Institute of America (GIA) is classified by letters of the alphabet, the best being D, colourless, and continuing through G to J, near colourless, right down to Z This procedure, employed in the grading of gemstones, is carried out in uniformly standardised, ideal lighting conditions. 5.7.2. Clarity Clarity indicates the presence (or lack of) inclusions inside the diamond, as well as external marks or blemishes. Most diamonds contain minute inner flaws or inclusions, often referred to as 'birthmarks", as they occurred during the long formation process of the diamond, over millions or billions of years under extreme heat and pressure deep within the earth's core. Clarity is graded according to the visibility of inclusions or blemishes under tenfold magnification. The top grade, reserved for the rarest and most highly prized diamonds, is flawless (FL), showing no inclusions or blemishes. This ranges downwards through IF, internally flawless, meaning only blemishes and no inclusions, WSI, meaning very, very slight inclusions, difficult to see under magnification even for an experienced grader, VS, or very slight, SI, slight dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he diamond on above factors, DBUK issues a grading report to the Diamantaire certifying the properties of the diamonds. A sample copy of the grading report to explain the terms colour, clarity, carat and cut was also submitted before your Honours. 56. Based on the aforesaid submissions and facts brought on record, the ld. CIT (A) has held that by rendering grading fees, assessee does not provide its sightholders any use or right to use any copyright etc., as defined in Article 13(4) and also relied upon the decision of the Bombay High Court in the case of Diamond Services International (P) Ltd. (supra). The ld. DR has submitted that assessee has own set of practices/ standards while grading and therefore, the income earned from providing grading services is chargeable to tax as royalty. Before us it has been submitted that income from inscription fees has been offered to tax by assessee as royalty income; whereas assessee has claimed that receipts from grading services are not taxable in the absence of PE in India. It has also been brought on record that ld. DRP in A.Y.2011-12 has accepted that grading services are not taxable in India. 57. We find that this issue stands covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to call themselves as "DTC Accredited Business" (v). After considering the detailed submission filed by DBUK, the learned CIT(A) noted that the fees charged by DBUK for "DTC Accredited Business Programme" is not for use or right to use any copyright, artistic or scientific work, patent, trademark etc. In fact as specifically pointed out in Appendix B (supra), there is no logo or signature for "DTC Accredited Business and therefore there is no question of treating the impugned receipts towards any trademark, patent, etc. 60. Further reliance was also placed on the decision of Cushman & Wakefield (S) Pte Ltd (305 ITR 208) wherein it has been held that the use of a name cannot be regarded as a trademark. Further, DTC Accredited Business' is not a registered trademark and there is no sign or logo designed for the same. Relying on the above decision, it was also submitted that assessee is not the owner of the name DTC Accredited Business and hence, mere use of the name cannot be construed to be royalty and should not be taxable in India. 61. In view of the above, the learned CIT(A) has also held that the services rendered by the assessee are not taxable as royalty or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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