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GECF Asia Limited C/o KPMG, Lodha Excelus Apollo Mills Compound N.M. Joshi Marg, Mahalaxmi Mumbai 400 011 V/s. Dy. Director of Income Tax International Taxation3(1) Mumbai
August, 08th 2014
                 ,   `' 

                               "L" BENCH, MUMBAI

  . . ,  ,    ,    


                       . / ITA no. 8922/Mum./2010
                     (  / Assessment Year : 2007­08)

GECF Asia Limited
C/o KPMG, Lodha Excelus
                                                                   .................  /
Apollo Mills Compound
N.M. Joshi Marg, Mahalaxmi                                                         Appellant
Mumbai 400 011


Dy. Director of Income Tax
                                                                    ...................  /
International Taxation­3(1)
Mumbai                                                                          Respondent

  ./ Permanent Account Number ­ AACCG7103P

                   / Assessee by :                 Mr. Rajan Vora
                   / Revenue by               :    Mr. Ajay Kumar Shrivastava

     /                                                    /
Date of Hearing ­ 25.06.2014                         Date of Order ­ 06.08.2014

                                       / ORDER

 ,     /

      The   present    appeal    has   been       preferred   by     the     assessee,

challenging the impugned final assessment order dated 14th October
                                                            GECF Asia Limited


2010, passed by the learned Dy. Director of Income Tax (International

Taxation) [for short "the learned DDIT(I.T)"], Mumbai, in pursuance of

the direction given by the Dispute Resolution Panel­I (DRP), Mumbai,

for the assessment year 207­08. The assessee has raised following

grounds of appeal:­

     "1. The Assessing Officer and the DRP erred in determining the
     income of the assessee at ` 3,83,62,648, as against NIL income
     returned by the assessee and thereby erred in determining the
     tax liability at ` 2,27,50,035.

     2. On the facts and in the circumstances of the case and in law
     the learned Assessing Officer erred in confirming the proposed
     addition of ` 3,83,62,648, being the amount received by the
     appellant for services rendered under the Master Service
     Agreement, 2005 to GE Money Financial Services Ltd. as being in
     the nature of royalty income and hence, taxable in India.

     On the facts and in the circumstances of the case and in law the
     learned Assessing Officer erred in initiating and the DRP has
     erred in upholding the initiation of penalty proceedings under
     section 274 r/w section 271(1)(c) of the Act."

2.   Facts in brief:­    The assessee      is a   non­resident    company

incorporated in Thailand and is a tax resident of Thailand. Accordingly,

it has claimed treaty benefit under the India­Thailand DTAA. The

assessee company is engaged in the business of providing services to

meet the needs of various G.E. Group companies. It has entered into

Master Agreement, 2005 with the G.E. Countrywide Consumer Financial
                                                          GECF Asia Limited


Services Ltd. (GEMFSL), wherein the assessee is required to provide

following Services:­

           Accounting and Finance Support Services
           Human Resources Services
           Legal and Compliance Services
           Risk Management Services
           Quality Consultation and Training
           Sales and Marketing
           Information Technology and System Support
           Strategic Management Assistance

3.   During the year, the assessee has received an amount of ` 3.84

crores from GEMFSL under the Master Service Agreement for providing

the aforesaid services. In the return of income filed for the assessment

year 2007­08, the assessee had shown its income at "nil" on the

ground that the income accrued to the assessee qualifies as business

income and the same cannot be taxed under Article­7 as the assessee

has no Permanent Establishment (P.E) in India as defined in Article­5

of India­Thailand DTAA. In the draft assessment order, the Assessing

Officer held that consideration received by the assessee from the

provisions of services from outside India to GEMFSL is on account of

business connection in India and, hence, taxable under the domestic

law i.e., Indian Income Tax Act. He also held that services rendered by
                                                              GECF Asia Limited


the assessee would also fall within the definition of "fees for technical

services" as envisaged under section 9(1)(vii) of the Act and, hence,

the same is taxable in India. Alternatively, he held that the services

rendered by the assessee would also fall within the definition of

"royalty" under the Article­12(3) of the treaty and, hence, would be

taxable in India. Against the said draft assessment order, the assessee

filed its objection before the DRP and also the copy of tax residency

certificate issued by the Thailand tax authorities. The DRP directed the

Assessing Officer to tax the receipts from the services rendered by the

assessee as "royalty" under Article­12(3) of the DTAA, without giving

any opinion or direction on non taxability as business connection in

India or Fees for Technical Services (for short "FTS"). The DRP quoted

the conclusion of the Assessing Officer in the following manner:­

     "From the above definition it can be seen that the term Royalty
     includes not only the right to use any copyright payments,
     trademark, design or any industrial, commercial or scientific
     equipments. The definition specifically includes any payment for
     information concerning the industrial, commercial or scientific
     experience. The use of word experience indicates that the
     intention of the legislature is to cover any fees paid to any
     consultant for providing any advice based on his experience, i.e.,
     the knowledge, knowhow and expertise that he has gained over
     the years. In the assessee's as per Schedule­4 of the Master
     Service Agreement 2005, clearly indicates that the payments
     made to the assessee are for consultancy services provided by
     the Chief Executive Officer, CIO, Legal Service Team, Group Risk
     Team, Finance Team, etc. In other words one can say that the
     payments made to the assessee company is for the information /
     advice given by the aforesaid people/team. These people / team
     are specialists in their subject matter and have years of
                                                             GECF Asia Limited


     experience in the industrial, commercial or scientific fields.
     Therefore, it is held that the payments made to the assessee
     company are for providing industrial, commercial or scientific
     experience and, hence, the receipts are taxed as Royalty in the
     assessee's hands."

4.   Thereafter, the DRP confirmed the aforesaid conclusion of the

Assessing Officer and directed the Assessing Officer to tax such

payment as royalty after giving following directions:­

     "The assessee has also claimed the benefit of Indo­Thailand
     DTAA and has submitted a copy of TRC placed in the paper
     book­I, is seen that the arguments of the A.O. shall be
     applicable even in the case of the definition as given in article
     12(3) of Indo­Thailand DTAA. The ground of objection,
     therefore, deserve to be dismissed."

     The A.O. is therefore directed to examine the Tax Residence
     Certificate and in case the assessee is liable to tax in Thailand
     the beneficial rate as Indo­Thailand DTAA shall be applicable."

5.   Accordingly, the Assessing Officer, in pursuance of such direction

held that the payments received by the assessee are for providing

industrial, commercial or scientific experience and, hence, the receipts

are taxable as "royalty" within the meaning of Article­12(3) of the

Indo­Thailand DTAA and tax the said receipts @ 15%.

6.   Before us, the learned Counsel, Shri Rajan Vora, on behalf of the

assessee, submitted that the India­Thailand tax treaty does not have

any separate Article for FTS and, accordingly, the income from the

services rendered by the assessee would be governed by Article ­7.
                                                               GECF Asia Limited


Since the assessee does not have any P.E. within the meaning of

Article­5, therefore, the said receipts cannot be taxed in India. The fact

that the assessee does not have a P.E., has not been disputed by the

Assessing Officer. He also pointed out that in the assessment year

2006­07, the Assessing Officer had taxed the similar receipts from

GEMFSL as being in the nature of FTS under the Act, however, in the

first appeal, the learned Commissioner (Appeals) held that in the

absence of any FTS clause under the India Thailand treaty and in the

absence of P.E. of the assessee in India, the said receipts could not be

taxable in India. Thereafter, no further appeal has been preferred by

the Department. Regarding taxability of the said receipt as "royalty"

under the Article­12, he submitted that the services rendered by the

assessee are not in respect of the "use of" or the right to use of any

patent,   invention,   model,   design,   secret,   formula,     process     or

trademark, etc., as defined in Para­3 of Article­12. It will also not fall

under imparting of any information concerning technical, industrial,

commercial or scientific knowledge or experience or skill, because there

is no transfer of any knowledge, skill, or experience. He further

referred and relied upon Para­11 of OECD commentary on Article­12,

wherein the term "industrial, commercial and scientific experience" has

been explained. He specifically drew our attention to Para­11.2 and

11.3 of the commentary. He submitted that the crucial point to see is,
                                                            GECF Asia Limited


whether such services fall within the ambit of "royalty" or whether

there is any imparting of knowhow. If knowhow has not been

transferred then the services rendered on account of industrial,

commercial and scientific cannot be held as royalty. In support of his

contention, he strongly relied upon the following case laws:­

     1.    M/s. McKinsey & Co. (Thailand) v/s DDIT,               ITA
           no.7624/Mum./2010, order dated 10th July 2013
     2.    DDIT v/s Preroy AG, [2010] 39 SOT 187 (Mum.)
     3.    Diamond Services International Pvt. Ltd. v/s UOI & Ors.,
           [2008] 304 ITR 201 (Bom.)
     4.    JDIT v/s Harvard Medical International, USA, [2012] 13 ITR
           (Trib.) 623 (Mum.)
     5.    Spice Telecom v/s ITO, [2008] 113 TTJ 502 (Bang.)
     6.    KPMG India Pvt. Ltd., v/s DCIT, [2012] 17 ITR (Trib.) 569
     7.    Bharati AXA General Insurance Co. Ltd. In re, [2010] 326
           ITR 477 (AAR)
     8.    Anapharn Inc., In re, [2008] 305 ITR 394 (AAR)
     9.    Kotak Mahindra Primus Ltd. v/s DDIT, [2006] 105 TTJ 578
     10.   DDIT(IT) v/s Euro RSCG Worldwide Inc. [2013] 153 TTJ 378

7.   The learned Departmental Representative, on the other hand,

submitted that, whether the services rendered by the assessee are in

the nature of "royalty" depends upon the terms and conditions of the

agreement and the nature of transactions. All the services which have
                                                           GECF Asia Limited


been enumerated in the agreement can only be rendered by a person

of an experience in various fields. He also drew our attention to certain

services like accounting and final support services for which lot of

experience is required and not only that, while rendering such services,

there is parting of knowhow also. The services rendered by the

assessee fall within the ambit of giving information concerning

industrial, commercial or scientific experience as appearing in Para ­3 of

Article­12. He also referred to Para­11.6 of OECD commentary, which

deals with the practically of the situations in the contracts which cover

both knowhow and the provisions of technical assistance. If one part of

the services fall within the ambit of imparting of knowhow and other

part falls within the services, then it should be construed as royalty

only. In the case of assessee also, some of the services can be

classified as "royalty".

8.   We have heard the rival submissions and perused the impugned

order and the material placed on record. The assessee has been

rendering various services, as highlighted above, to foreign G.E. Group

companies and in India to GEMFSL. Admittedly, the assessee does not

have a P.E. in India and, therefore, if any receipt which is to be taxed,

would be in accordance with Article­7, only and in that case, the same

will not be taxable in India. The only issue of dispute which remains to
                                                              GECF Asia Limited


be adjudicated after the direction of the DRP is, whether the payment

received by the assessee in lieu of services rendered to GEMFSl is

taxable as "royalty" under Article­12(3) or not. If it is a "royalty", then

the same would be taxable in India as per the rates prescribed under

the treaty. Article­12(3), under India­Thailand Tax DTAA reads as



     The term "royalties" as used in this article means payments
     of any kind received as a consideration for the alienation or
     the use of, or the right to use, any copyright of literary,
     artistic or scientific work (including cinematograph films,
     phonographic records and films or tapes 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."

9.   The Revenue's case is that the services rendered by the assessee

are in the nature "of information concerning industrial, commercial or

scientific experience". The OECD commentary on model convention on

Article­12, has explained the term "industrial, commercial or scientific"

experience in the following manner:­

     11. In classifying as royalties payments received as consideration
     for information concerning industrial, commercial or scientific
     experience, paragraph 2 alludes to the concept of "know-how".
     Various specialist bodies and authors have formulated definitions
     of know-how which do not differ intrinsically. One such definition,
                                                            GECF Asia Limited


given by the ''Association des Bureaux pour la Protection de la
Propriete Industrielle" (ANBPPI), states that "know-how is all the
undivulged technical information, whether capable of being
patented or not, that is necessary for the industrial reproduction
of a product or process, directly and under the same conditions;
inasmuch as it is derived from experience, knowhow represents
what a manufacturer cannot know from mere examination of the
product and mere knowledge of the progress of technique".

11.1 In the know-how contract, one of the parties agrees to
impart to the other, so that he can use them for his own account,
his   special   knowledge     and    experience   which    remain
unrevealed to the public. It is recognised that the grantor is not
required to play any part himself in the application of the
formulas granted to the licensee and that he does not guarantee
the result thereof.

11.2 This type of contract thus differs from contracts for the
provision of services, in which one of the parties undertakes to
use the customary skills of his calling to execute work himself for
the    other   party.    Payments      made    under   the   latter
contracts generally fall under Article 7.

11.3 The need to distinguish these two types of payments, i.e.
payments for the supply of know-how and payments for the
provision of services, sometimes gives rise to practical difficulties.
The following criteria are relevant for the purpose of making that

      Contracts for the supply of know-how concern
      information of the kind described in paragraph 11 that
      already exists or concern the supply of that type of
      information after its development or creation and
      include     specific     provisions  concerning    the
      confidentiality of that information.

In the case of contracts for the provision of services, the supplier
undertakes to perform services which may require the use, by
that supplier, of special knowledge, skill and expertise but not the
transfer of such special knowledge skill or expertise to the other
In most cases involving the supply of know-how, there would
generally be very little more which needs to be done by the
supplier under the contract other than to supply existing
                                                              GECF Asia Limited


      information or reproduce existing material. On the other hand, a
      contract for the performance of services would, in the majority of
      cases, involve a very much greater level of expenditure by the
      supplier in order to perform his contractual obligations. For
      instance, the supplier, depending on the nature of the services to
      be rendered, may have to incur salaries and wages for employees
      engaged in researching, designing, testing, drawing and other
      associated activities or payments to sub-contractors for the
      performance of similar services.

      11.4 Examples of payments which should therefore not be
      considered to be received as consideration for the provision of
      know-how but, rather, for the provision of services, include:

         payments obtained as consideration for after-sales service

         payments for services rendered by a seller to the purchaser
         under a guarantee, payments for pure technical assistance,

         payments for an opinion given by an engineer, an advocate
         or an accountant, and

         payments for advice provided electronically, for electronic
         communications with technicians or for accessing, through
         computer networks, a trouble-shooting database such as a
         database that provides users of software with non-
         confidential information in response t frequently asked
         questions or common problems that arise frequently.
         "emphasis supplied".

10.   From the above, it can be gathered that the royalty payment

received   as   consideration   for   information    concerning    industrial,

commercial, scientific experience alludes to the concept of knowhow.

There is an element of imparting of knowhow to the other, so that the

other person can use or has right to use such knowhow. In case of

industrial, commercial and scientific experience, if services are being

rendered simply as an advisory or consultancy, then it cannot be

termed as "royalty", because the advisor or consultant is not imparting
                                                              GECF Asia Limited


his skill or experience to other, but rendering his services from his own

knowhow and experience. All that he imparts is a conclusion or solution

that draws from his own experience. The eminent author Klaus Vogel in

his book "Klaus Vogel On Double Tax Convention" has reiterated this

view on difference between royalty and rendering of services in the

following manner:­

      "Imparting of experience: Whenever the term "royalties" relates
      to payments in respect of experience (knowhow) the condition
      for applying art.12 is that the remuneration is being paid for
      "imparting" such knowhow.... In contrast, the criterion used to
      distinguish the provisions of know­how from rendering advisory
      services is the concept of imparting. An advisor or consultant,
      rather than imparting this experience, uses it himself (BFH
      BStBI.II 235 (1971); Minister des Relations exterieures,
      Reponses a M. Bockel, 36 Dr. Fisc. Commn. 1956 (1984). All
      that he imparts is a conclusion that he draws inter­alia from his
      own experience. His obligation to observe secrets, or even his
      own interest in retaining his "means of production' will already
      prevent a consultant from imparting his experience. In contrast
      to a person using his own know=­how in providing advisory
      services, a grantor of know­how has nothing to do with the use,
      the recipient makes of it."

11.   The thin line distinction which is to be taken into consideration

while rendering the services on account of information concerning

industrial, commercial and scientific experience is, whether there is any

imparting of knowhow or not. If there is no "alienation" or the "use of"

or the "right to use of" any knowhow i.e., there is no imparting or

transfer of any knowledge, experience or skill or knowhow, then it

cannot be termed as "royalty". The services may have been rendered
                                                           GECF Asia Limited


by a person from own knowledge and experience but such a knowledge

and experience has not been imparted to the other person as the

person retains the experience and knowledge or knowhow with himself,

which are required to perform the services to its clients. Hence, in such

a case, it cannot be held that such services are in nature of "royalty".

Thus, in principle we hold that if the services have been rendered de­

hors the imparting of knowhow or transfer of any knowledge,

experience or skill, then such services will not fall within the ambit of

Article­12. Since neither the Assessing Officer nor the DRP has

examined the nature of service rendered by the assessee from this

angle therefore, we are of the opinion that the matter should be

restored back to the file of the Assessing Officer to examine the nature

of services in line of the principles discussed above. If such services do

not involve imparting of knowhow or transfer of any knowledge,

experience or skill, then it cannot be held to be taxable as royalty.

Since the issue of FTS is not the subject matter of dispute after the

direction of the DRP, hence, we are not expressing any opinion on FTS.

Thus, ground no.1 and 2, are treated as partly allowed for statistical


12.   Ground no.3, relates to initiation of penalty proceedings under

section 271(1)(c), which is not only pre­mature but has also become
                                                              GECF Asia Limited


infructuous in view of our findings given above. Consequently, ground

no.3, is dismissed as infructuous.


13.   In the result, assessee's appeal is partly allowed.

              6th August 2014   

      Order pronounced in the open Court on 6th August 2014

            Sd/-                                               Sd/-
      . .                                                    
     B.R. BASKARAN                                      AMIT SHUKLA
  ACCOUNTANT MEMBER                                   JUDICIAL MEMBER

 MUMBAI,  DATED: 6th August 2014

     / Copy of the order forwarded to:

(1)    / The Assessee;
(2)    / The Revenue;
(3)    () / The CIT(A);
(4)     / The CIT, Mumbai City concerned;
(5)    ,   ,  / The DR, ITAT, Mumbai;
(6)     / Guard file.
                                          / True Copy
                                             / By Order
 .  / Pradeep J. Chowdhury
   / Sr. Private Secretary
                                 /   / (Dy./Asstt. Registrar)
                                ,  / ITAT, Mumbai
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