, ""
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
|
