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ACNielsen Corporation,ORG Marg Pvt. Ltd., Voltas House A, 2nd floor, Dr.B Ambedkar Road, Chinchpokali, Mumbai-400033. Vs. Assistant Commissioner of Income Tax, (1), Scindia House, Ballard Pier, Mumbai-400038
August, 13th 2014
                    ,                  ""          
      IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI

     BEFORE S/SHRI B.R.BASKARAN (AM) AND          AMIT SHUKLA, (JM)
       .. ,                                       ,               

                 ./I.T.A. No.1901 to 1903/Mum/2010
           (   / Assessment Years : 2004-05 to & 2006-07)

 ACNielsen Corporation,             /         Assistant Commissioner of Income
 ORG Marg Pvt. Ltd.,                Vs.       Tax,
 Voltas House "A", 2nd floor,                 (International Taxation)-1(1),
 Dr.B Ambedkar Road,                          Scindia House, Ballard Pier,
 Chinchpokali,                                Mumbai-400038
 Mumbai-400033.
        ( /Appellant)                ..       (    / Respondent)

          . /   . /PAN/GIR No. : AAECA8632R

             / Appellant by               :   Shri Madhur Agarwal
               /Respondent by :               Smt. Neeraja Pradhan


              / Date of Hearing
                                                  : 25.6.2014
             /Date of Pronouncement : 8.8.2014


                                  / O R D E R

Per B.R.BASKARAN, Accountant Member:


       All the three appeals filed by the assessee are directed against the three

separate orders     dated 11.1.2010 passed by Ld CIT(A)-10, Mumbai for the

assessment years 2004-05, 2005-06 and 2007-08.            Since the issues urged in

these appeals are identical in nature, these appeals were heard together and are

being disposed of by this common order, for the sake of convenience.


2.     In all the three years, the assessee is challenging the decision of Ld

CIT(A) in holding that the consideration received by the assessee, which are in

the nature of reimbursement of expenses along with a mark up of 10%, is
                                        2            I.T.A. No.1901 to 1903/Mum/2010



taxable in India both as "royalty" and "Fee for included services" in equal

proportion.


3.   The facts relating to the case are stated in brief.   The assessee herein is a

tax resident of USA. It belongs to AC Nielson Group, which is one of the world's

leading business, management & market research companies. The AC Neilson

group also offers other marketing information services tailored to the needs of

industries like pharmaceuticals, financial services, telecommunications etc. The

AC Neilson group is represented in India through its two legal entities viz., M/s

ACNielson Org-Marg Private Ltd ("ACNOM") for customized research services &

retail measurement services and M/s ACNielson Research Services Pvt Ltd

("ACNRS") for customized market research services.           The assessee herein

entered into a General Service Agreement (GSA) in the year 2003 with both the

Indian entities cited above. The nature of services to be provided are described

as under in the agreement:-

      "Group Services and Regional Group Services, as they may be amended
      from time to time , include but are not limited to :

      a. Development and determination of short and long term business
         strategies;
      b. Overall management and coordination in relation to general policies
         and strategies per country and per division ;
      c. maintenances of external relationships, to the extent that these
         services do not comprise Shareholder services;
      d. Human resources services regarding group policies;
      e. Legal services;
      f. Insurance services;
      g. development, control and maintenance of management
         information systems;
      h. administrative support to group companies, including
         analysis of management information;
      i. development short and long term IT policies and strategies;
      j. management and co-ordination of IT policies between
         group companies;
                                         3           I.T.A. No.1901 to 1903/Mum/2010






      k. tax services;
      l. financial risk management services, to the extent these
         services do not comprise Financing Services.
      m. support in the area of international staffing, career
         development and international job rotation and
      n. market research, target research and competitor research "

For providing the services enumerated above, the assessee herein is

compensated by the Indian entities cited above. According to the assessee, it

received amounts from the above said Indian entities at the rates computed at

Cost plus 10% mark up. According to GSA agreement, there will not be any

mark up in respect of third party expenses.       Thus, the mark up of 10% is

charged in respect of costs incurred by the assessee company only.


3.1    The assessee company claimed that the amounts received by it from the

Indian entities cited above are not taxable under the Indian Income tax Act. In

this connection, it appended following notes in the return of Income filed by it :

      "Notes

       "1) The assessee has entered into a General Service Agreement with
      ACNeilsen Research Services Pvt. Ltd. and ACNeilsen Org.-Marg Pvt.
      Ltd. for rendering of services prescribed in such agreement. The
      assessee has received a sum of Rs.77,679,163/- towards
      reimbursement of expenses which is inclusive of a Mark-up of 10%. The
      assessee is a tax resident of USA and thereby the provisions of Indo-
      USA Tax Treaty would be applicable. The assessee also holds Tax
      Residency Certificate issued by the Tax Authorities of USA.
      The reimbursement of expenses received by the assessee cannot be
      termed as "Royalties or fees for included services" under Article 12 of the
      Indo ­ USA.

            The reimbursement of expenses received by the Assessee cannot
      be termed as "Royalties or fees for included services" under Article 12 of
      the Indo-USA Tax Treaty. Since reimbursement of expenses is not
      covered by Article 12 of the Indo ­USA Tax Treaty, Article 7 dealing with
      business income merits examination.

      However, the assessee is not having a permanent establishment in
      India as defined in Article 5 of the Indo-USA Tax Treaty and therefore its
      income is not taxable in India by virtue of Article 7 of the Indo-USA Tax
                                        4           I.T.A. No.1901 to 1903/Mum/2010



        Treaty.

        In view of the above, the Mark-up of 10% on the reimbursement of
        expense would also be not taxable".


3.2     However, the AO did not agree with the contentions of the assessee. The

view expressed by the AO in AY 2004-05 are discussed hereunder. The AO

noticed that the assessee company calls for certain copyrighted products from

the US Company, viz., Questionnaires etc to do the job for the client. Further

the assessee company also gets the benefit of on-going research conducted and

also the research products of US company in the field of financial management,

HR management etc.       He further observed that the products supplied by US

company are copyright protected and they are provided for non-exclusive usage

by the assessee herein for the purposes for which they are provided. In this

connection, the AO referred to certain definitions given under Copyright Act,

1957.    The AO further referred to the decision rendered in the case of E.P.W.Da

Costa Vs. Union of India (1980)(121 ITR 751)(Delhi) and accordingly came to the

conclusion that the information so provided is not mere data but a scientific

knowledge. The AO, by placing reliance on the following decisions, came to the

conclusion that the payments received by the assessee company would fall in the

category of "royalty".

        (a) CIT Vs. Travel Corporation of India Ltd
            (1994)(209 ITR 555)(Bom)
        (b) P.No.30 of 1999, In re (1999) 238 ITR 296)(AAR)


Accordingly, the AO held that the impugned receipts are taxable as Royalty

within the meaning of sec. 9(1)(vi) of the Income tax Act, 1961 and also under
                                        5           I.T.A. No.1901 to 1903/Mum/2010



Article 12 of the DTAA entered between India and USA. The conclusion reached

by the AO is extracted below:-

       "The non-resident company is getting consideration for parting with
      copyright protected information meant for commercial, scientific and
      industrial use. The essence of the matter is that the US company
      conducts market research in these areas and prepares questionnaires,
      diagrams, charts, tables etc. These "products" are then flashed to group
      companies including the Assessee company. As and when there is a client
      with the Assessee company, Assessee company can order for such
      product from US company. US company will provide hard copy or soft
      copy for a consideration"


Accordingly, the AO assessed the impugned receipts as "Royalty" in assessment

year 2004-05.


3.3     However, in assessment years 2005-06 and 2006-07, the AO took the

view that the consideration received by the assessee is both in the nature of

"royalty" and "Fees for included services" within the meaning of Article 12 of the

DTAA entered between India and USA.            Accordingly, he apportioned the

consideration in equal proportion between "royalty" and "fee for included

services" and accordingly assessed the same in the hands of the assessee herein.


4.    In the appeal filed, the Ld CIT(A) affirmed the view taken by the AO in AY

2005-06 and 2006-07 that the consideration received by the assessee is both in

the nature of "Royalty" and "Fees for included services". Accordingly, the Ld

CIT(A) modified the order passed by AO for AY 2004-05 and directed him to

assess the consideration both as "Royalty" and "Fees for included services" in

equal proportion.


5.    Aggrieved, the assessee has filed these three appeals before us.
                                         6           I.T.A. No.1901 to 1903/Mum/2010



6.     We have heard the rival contentions and perused the record. From the

arguments advanced by both the parties, we notice that there is no dispute

between the parties with regard to the fact that the question taxability of the

consideration received by the assessee needs to be examined in terms of DTAA

entered between India and USA. However, from the discussions made supra, it

may be noticed that the assessing officer has proceeded to examine the

taxability of the impugned consideration by referring to the provisions of sec.

9(1)(vi) of the Income tax Act, Copyright Act and certain decisions rendered in

some other context. In fact, the AO took the view that the entire consideration

is taxable as "Royalty" in AY 2004-05, but changed his view in the subsequent

two years. In respect of the assessment year 2004-05 also, the assessing officer

has furnished a remand report before the Ld CIT(A), wherein he had suggested

that the impugned receipt is required to be treated as both "Royalty" and "Fees

for included services".


6.1     The Ld CIT(A) has, however, tried to examine the nature of receipt in

terms of Indo-US treaty, but he again ended with confusion by expressing

different views. For the sake of convenience, we extract below the observations

made by the Ld CIT(A) in his order passed for assessment year 2004-05:-

        "1.3.3. Whether the nature of GSA services as mentioned in para
       1.2.0. above, rendered by the appellant would fall under the Royalty'/
       fees for included services' the definition royalty needs to be examined.
       The royalty is defined under Article 12(3) of India-US DTAA as follows:

       "3. The term "royalty" as used in this article 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 including cinematograph films or work on film, tape or
            other means of reproduction for use in connection with radio or
            television broadcasting, any patent, trademark, design or mode!,
                                  7            I.T.A. No.1901 to 1903/Mum/2010



      plan, secret formula or process, or for information concerning
      industrial, commercial or scientific experience, including gains
      derived from the alienation of any such right or property which are
      contingent on the productivity, use, or disposition thereof, 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 payments derived by an enterprise described in
      paragraph 1 of Article 8 (Shipping and Air Transport) from
      activities described in paragraph 2( c ) or 3 of Article 3


1.3.4 It is seen that the definition of royalty includes literary work. This
word is defined under section 2(o) of Copy Right Act as "literary work"
includes computer programmes, tables and compilations including
computer databases ........"copyright" means the exclusive right subject to
the provisions of this Act, to do or authorize the doing of any of the
following acts in respect of a work or any substantial part thereof......."
The above receipts by the appellant from the Indian companies are
towards rendering of services can be termed towards use of copyright of
a literary, artistic, or a scientific work. The appellant company has
provided information of a copyright protected work to the Indian
companies to issue copies of the work not being copies already in
circulation, and computer programme. It cannot therefore ruled out that
the appellant company is providing secret information in market research
data which are being used by the Indian therefore the payment received
is towards Information concerning industrial, commercial or scientific
experience, which would fall under Article 12(3) (a) of the India-USA
DTAA. Reliance is placed on recent decision of Delhi High Court in DR
Hutarew & Partner (I) Pvt Ltd. vs. ITO Ward-10(4), New Delhi (ITA NO.
2797/De1/2004) (AY-2001-02) (dtd 5.9.2008) wherein Held, since the
non-resident was providing a client-oriented specific technical solution
after analyzing data with the aid of high-end software, it cannot be
equated with any other general services provided by any service provider.
Then an explanation has been appended to clause (vii) of section 9(1) of
the Act with retrospective effect that if services have been used by the
assessee within India, then it is immaterial whether the nonresident has a
residence or place of business or business connection in India as the sum
paid to non-resident would be included in the income, which will be
deemed to have accrued to the non-resident. And it will be subject to TDS
provisions - Assessee's appeal dismissed. This ratio of this decision is
squarely applicable in the case of assessee as the appellant.
1.3.5. During the Assessment Year under consideration, the GSA expenses
charged to Indian companies comprised of the following broad expense-
heads, which has been recovered from the Indian companies:
·    Market Research GSA
·    Regional Area charges;
·    VNU Services BV charges; and
                                          8            I.T.A. No.1901 to 1903/Mum/2010



        ·   MMI charges

     1.3.6. The perusal of invoices raised by the appellant showed that these are
     raised on account of services rendered in market research, regional expenses,
     allocation, VNU services BV charges and MMI charges. This manifest that
     such activity and nature of services as enumerated in Article 2(2) of GSA
     would be clearly in the nature of information concerning scientific,
     commercial and marketing. Therefore, these would be covered under the
     definition of Royalty/fees for included services under Article 12 of India-US
     DTAAT"


7.       Before us, the Ld A.R vehemently argued that the consideration received

by the assessee will not fall within the meaning of either "Royalty" or "Fees for

included services". The contentions of Ld A.R are summarized below:-

The Appellants arguments against the impugned Order passed by the CIT(A) are

as under:

        "Arguments on payments not being in the nature of Royalty:


        o The receipts cannot be termed as 'royalties' as the Appellant did not
        hold any property, patented product; etc. and to support this contention
        he invited our attention to pages 31 to 35 of the compilation and also
        relied on the pages 7 to 12 of CIT(A) Order.

        o The receipts cannot be considered as a payment `for information
        concerning industrial, commercial or scientific experiences' so as to come
        within the ambit of the term Royalty. A payment can be regarded as `for
        information concerning industrial, commercial or scientific experiences' if it
        inter alia fulfills the following conditions:

        · The information must be in the nature of know how.

        · The information must be existing information and should not be new
        information obtained as a result of performing services.

        · The contract should not be in the nature of rendering or performance of
        services.

        · Very little is required to be done to supply know how.
                                  9           I.T.A. No.1901 to 1903/Mum/2010



o In the case of the Appellant as none of the aforesaid conditions are
satisfied, there is no question of the receipts by the Appellant be regarded
payment for information concerning industrial, commercial or scientific
experiences.' Therefore, the payments received by the Appellant are not
in the nature of royalty.

o Reliance is placed on Para 11 of the OECD Commentary on Article 12.

o Reliance is placed on the following decisions on the subject:-

· DDIT v/s. Preroy A.G. [(2010) 39 SOT 187 (Mum.)] wherein it was held
that provision of strategic consultancy services would not amount to
provision of 'know-how' services accordingly the receipt could not be
termed in the term of royalty.

· DCIT v/s. Hyderabad Industries Ltd. [(2008) 24 SOT 98 (Hyd.)] wherein
it was held that obtaining of market information would not amount to
royalty as there is not exclusive right over such information.

·      Cushman & Wakefield(S) Pte. Ltd. [(2008) 305 ITR 179 (AAR- New
Delhi)] wherein it was held that referral fees received for provision of
information of potential customers would not be term as "royalty' or 'fees
for technical services'.

· KPMG v/s. JCIT 1(2013) 142 ITD 323 (Mum-Trib.) wherein it was held
that fees paid to professionals who did not have any permanent
establishment in India and whose services were not in the nature of make
available, technical knowledge, experience, know-how or process would
not be taxable in India.

Arguments on payments not being in the nature of "fees for included
services"

o The receipts cannot be regarded as 'fees for included services' as
defined in Article 12(4) of the DTAA as the Appellant does not make
available any technical knowledge, experience, skill, know how or process
to the Indian Companies.

o The Appellant submits that to make available any technical knowledge,
experience, skill, know how or process would mean that the Indian
Companies would subsequently be able to render the same services.
Therefore, the receipt is not in the nature of included services'.

o Reliance is placed in the cases of CIT v Dc Beers India Minerals P. Ltd.
346 ITR 467 and DDIT v/s. Preroy A.G. [(2010)39 SOT 187 (Mum.)]
                                        10           I.T.A. No.1901 to 1903/Mum/2010



      o The lower authorities have not clearly stated as to according to then
      whether the payment is in the nature of royalty of fees for included
      services. Further, no logic / rationale whatsoever has been given by either
      of the lower authorities to reach the absurd conclusion that 50% of the
      receipt is royalties and the balance 50% is fees for included services. The
      CIT(A) has himself made contrary stands, since at various places in his
      Order he has stated the Appellant had rendered services, but has
      concluded that the consideration received for the same is taxable as
      royalties."




8.      The expressions "Royalty" and "Fees for included services" have been

given distinct meaning in the Indo US treaty.    We have already noticed that the

tax authorities were not able to come to a conclusion as to whether the

consideration received by the assessee company would fall within the meaning of

"Royalty" or "Fees for included services", even though there are plethora of case

laws explaining both the terms. Hence, from the foregoing discussions, we are

of the view that the tax authorities have not examined the impugned issue in

proper perspective, i.e., the matter has not been examined in the context of

Indo-US treaty by considering the meaning of various terms used therein. As

stated earlier, the meaning to be ascribed to various terms used in the treaty has

been the bone of contention in various case laws and we notice that the tax

authorities have not considered the applicable case laws.            Under these

circumstances, we are of the view that the impugned matter requires fresh

examination at the end of the assessing officer. When we expressed our view to

both the parties, they also accepted the fact that the matter has not been

examined by the tax authorities in proper perspective and accordingly agreed

that the matter requires fresh consideration at the end of the assessing officer.
                                             11          I.T.A. No.1901 to 1903/Mum/2010



9.       Accordingly, we set aside the orders passed by Ld CIT(A) in all the three

years and restore the matter to the file of the assessing officer with the direction

to examine the issue afresh by duly considering the submissions made by the

assessee, relevant case laws and take appropriate decision in accordance with

the law.


10.      In the result, all the appeals filed by the assessee are treated as allowed

for statistical purposes.




     The above order was pronounced in the open court on 8th August, 2014.

                                       8th        August, 2014    

              SD                                           sd

(   /AMIT SHUKLA)                                    (.. / B.R. BASKARAN)
     / JUDICIAL MEMBER                                  / ACCOUNTANT MEMBER


  Mumbai: 8th August, 2014.



. ../ SRL , Sr. PS


        /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent.
3.       () / The CIT(A)- concerned
4.        / CIT concerned
5.        ,     ,                   /
       DR, ITAT, Mumbai concerned
6.       / Guard file.
                                                                  / BY ORDER,
                True copy
                                                          (Asstt. Registrar)
                                          ,  /ITAT, Mumbai
12   I.T.A. No.1901 to 1903/Mum/2010

 
 
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